ADVICE on E--Procurement.

Few companies are enjoying the big savings that come from creating a true end-to-end e procurement system. In this interview Mike Parker, chief operating officer of CODA, an international developer of financial accounting and procurement software, explains why companies are missing out on larger savings and what they can do about it.

What is e-procurement, and why are companies turning to it?

A At its most basic, e-procurement simply means buying products and services over the Internet. In this sense, most companies are already using e-procurement. However, the term is coming more and more to mean automating the whole purchasing process and making order and requisition information available along the entire length of the value chain via the Internet. Such automation allows two-way communication of real-time financial and purchasing information without the need for electronic data exchange (EDI), middleware or value-added networks. Management at both the buying and selling end can see what's happening at any given moment and identify trends and problems. A shorter purchasing cycle enables companies to maintain lower inventory levels and respond more quickly to stock-outs.

Why not simply order products and services over the Internet and leave it at that? Wouldn't that still save you quite a bit?

A Actually, a lot of e-procurement packages simply automate the ordering process. Using a system like this to place orders over the Internet can save time and cut postage and paper costs. But, without integration to back-office finance systems, you miss out on the largest opportunities for savings. To take full advantage of e-procurement, you have to tie your procurement system not only into your financial system and but also into the systems of your customers and suppliers. You can then create a virtually paperless system from one end of the value chain to the other.

This sounds like something for large companies. What about smaller companies?

A Right now, large companies are leading the way into e-procurement. Getting such systems up and running does take time and money, although a recent study by Deloitte Consulting shows that return on investment reported by more than 200 survey respondents will average 300 percent over the first two to three years. Because of the costs, smaller companies are lagging.

What we're recommending to them is that they consider using application service providers (ASPs). By running their e-procurement and finance soft ware on an ASP's hardware, they can get the benefits of e-procurement without the cost of actually owning and maintaining the hardware.

Can you give a sense of how the handling of a purchase order differs if you tie the process into your back-office financial system and if you don't?

A If you tie your e-procurement to your financial system, you can make the entire process paperless. You can start with an electronic requisition that can be routed automatically for authorization. Requisition data is entered only once, and some of the data can be supplied automatically. This speeds up the process and reduces the chance for errors.

Once the requisition is approved, the actual purchase can be handled a number of different ways. The employee handling the order can call up electronic catalogs from approved suppliers and order directly from them. There are also online marts and auction sites the employee can go to, and some advanced systems can search approved vendors for the lowest price and make the purchase automatically.

Once the purchase has been made, the receipt of the goods can be handled through electronic matching of the goods received and the purchase order and the invoice. In some systems, the supplier is automatically notified that payment has been authorized. This saves the supplier from having to generate an invoice and simplifies the reconciliation process. There are a number of steps, but most are automatic, and in the best systems, all are paperless.

The key advantage is that your financial data is automatically updated throughout the process. People in accounts payable and purchasing don't have to keep re-entering the data, and management always has current information. You get the job done faster and eliminate redundant steps. You also save on paper and postage.

What specifically do you lose if you don't tie your systems together?

A E-procurement then becomes an isolated step. Instead of moving automatically throughout the value chain, the purchasing information stops in procurement. You wind up with data stored in a number of different places -- at considerable extra cost and with much greater opportunity for errors. In such systems, you are likely to find much of the process still being handled with paper documents. The supplier still prepares paper invoices and mails them out, while the buyers cut paper checks and mail them back. If management wants to check current purchases against budgets, it will have to draw data from several sources, and even then, the information won't be current.

What are the advantages for suppliers?

A For one thing, they can eliminate paper-based catalogs. If the software generates eXtensible Markup Language (XML), suppliers can process orders as a direct input, without going to the expense of EDI. Using XML, they can then notify the customer of delivery and transmit an invoice, and the customer's system can automatically match that invoice to the original order and post information to the financial back office. It's also possible for buyers to notify suppliers automatically of payment, relieving the suppliers of generating an invoice.

What are some of the latest trends?

A Now we are starting to see large companies move to commitment accounting. In this approach, managers set a budget against an item, and the average spend is automatically reduced once that item is purchased. Also, some of the latest soft ware has built-in rules on employee purchasing authorization and single click access to trading partners. So, if an employee is authorized to purchase a printer, the system can automatically direct the purchase to the vendor with the lowest price, and also make sure that the employee doesn't exceed his or her level of authorization.

Is e-procurement resulting in staff reduction in purchasing departments?

A In some cases, companies are reducing headcount, but many are simply having their purchasing people devote more time to selecting suppliers, negotiating prices and evaluating supplier performance. This can be a big money saver.

What is the likely long-term impact of e-procurement?

A E-procurement promises to cut operational costs all across the supply chain and improve management control. But to gain these benefits, you need a financial solution first so that you can use the process to leverage advantages right through to your customers, suppliers and other partners. The goal is a true end-to-end solution that enables companies to enter into truly collaborative relationships with customers and suppliers.