EPROCUREMENT: CUTTING COSTS, ADDING VALUE.

Research from Hackett reveals that electronic procurement is proving a huge boon to companies that have embraced it.

During the current economic slump, CFOs across the globe have been looking for ways to drive out costs to satisfy earnings predictions and maintain their companies' stock valuations. After a decade of cost-squeezing in the name of efficiency, these executives don't have many options to choose from. For some top-performing organizations, however, electronic procurement, or eProcurement, is creating opportunities for time and expense savings. In fact, eProcurement is enabling them to gain both efficiencies and operational effectiveness across the enterprise, as staffs are able to invest more in value-adding components.

Spurred by the notion that they can save millions of dollars annually, executives are taking a hard look at how to better manage their spending, particularly in two areas: how they do business with suppliers and how individuals place orders. Recent data and findings from Hackett Benchmarking & Research indicate that implementing eProcurement tools can save a company as much as 2 percent or more annually.

Hackett Benchmarking & Research, a part of Answerthink, benchmarks 80 percent of the Dow Jones Industrials, two-thirds of the Fortune 100 and nearly 60 percent of the Dow Jones Global Titans Index. Its ongoing benchmarking studies evaluate finance, procurement, human resources, information technology and other key staff functions.

Top-performing procurement organizations are leading the way by reducing the number of suppliers, implementing strategic sourcing and merging purchasing and payments into a single process. In the past several years, procurement applications offering these capabilities have been introduced through end-to-end automation of traditional non-production purchasing activities. Online catalogs and purchase orders, for example, not only reduce cycle time but also cut administrative costs and maverick purchases. And by linking procurement with other departments and to back-end applications, leading companies are reducing total costs and improving internal controls.

Yet, procurement function costs remain high, principally due to the heavy focus on transaction processing. Integration of suppliers and customers will enable procurement areas to concentrate on paring expenses and improving strategic value. However, the average company still spends 25 percent more on procurement than top companies, according to Hackett. As the accompanying chart indicates, most procurement spending is consumed by routine transactions, which can be more efficiently handled through automation.

Top-performing companies, on the other hand, conduct more than 20 percent of their procurement transactions online, reducing processing costs as a percentage of spending by nearly a third. These organizations are now positioned to deploy and benefit from the next generation of best practices, such as using the Web to provide suppliers with flexible yet secure access to their inventory systems.

Total technology spending for procurement has trailed most other back-office functions, according to Hackett, with only 10 percent of spending invested in technology; the typical finance function, by comparison, invests nearly twice as much. This discrepancy is due in part to the difficulty of integrating enterprise resource planning (ERP) software. At average as well as top-performing companies, having an ERP in place makes no statistically relevant difference in procurement costs.

Top-performing procurement organizations are driving even more use of purchasing cards -- a proven best practice. Many eProcurement vendors have built robust functionality that allows for automated account assignment, reconciliation and financial systems integration. Best-practices companies are capitalizing on the increased sophistication of these reporting and account allocation systems to more than double their purchasing-card usage for purchases under $1,000, to 34 percent, up from 14 percent in 1998. Average companies have also increased usage of p-cards, though more modestly. Utilization levels rose to 23 percent from 12 percent in the same time period.

By implementing best practices such as bar coding, electronic ordering, procurement cards and blanket purchase orders, companies can reap the advantages presented by eProcurement, Not the least of these is that, through self-service capabilities, routine purchasing activities may be performed by the requisitioner. This allows procurement professionals to tackle more important, value-adding activities such as strategic sourcing and monitoring of supplier performance.

One of the most effective best practices is ongoing rationalization of suppliers. Top performers in Hackett studies continue to show significant alignment and partnering with fewer suppliers. This focus promotes other leading practices, such as online catalogs and electronic ordering, not to mention better negotiated pricing due to leveraged buying. In fact, the average procurement organization has substantially reduced the number of suppliers per billion dollars in spending -- a 27 percent drop since 1998, versus a 13 percent reduction for top-performing companies. A focus on fewer vendors, too, promotes best practices like automated ordering and better negotiated pricing due to more leveraged buying power.

The efficiencies of eProcurement are pushing more transactional activities into business operations. Between 1998 and 2001, the number of companies at which transaction processing staff reported directly to business operations (as opposed to a separate purchasing department) rose from 8 to 17 percent. At world-class companies, the implementation of best practices has freed up skilled procurement professionals for more value-adding activities.

True end-to-end eProcurement is hampered in the short term by a lack of comprehensive payment and settlement solutions. Market leaders are working on more sophisticated invoicing, payment, reconciliation, authentication and security features. But until these challenges are met, business-to-business partners will not he able to fully exploit electronic procurement.

Companies that have implemented eProcurement and have some level of integration with the purchasing and payables applications have realized productivity gains ranging from 25 to 60 percent, as cited in Hackett's best practices studies. Realization of benefits has hinged largely on the degree to which users had access to, and were committed to, an eProcurement application.

That said, centralized procurement functions have consistently been able to outperform decentralized ones, with lower processing costs. Thus, it is a reasonable prediction that as the purchasing function becomes increasingly automated and integrated with the supply chain, procurement and related decision-making will be done more efficiently, as well as more effectively, on a decentralized basis.

With traditional procurement processes costing up to $177 per purchase order, the opportunities for savings and performance improvement are vast. Progressive companies are transforming the function into a true value-generator by harnessing the unique qualities of the Internet to drive savings and integrate processes more closely with suppliers and vendors. However, many companies still remain hamstrung by inefficient processes that perpetuate the stereotype of procurement as a low-value-adding function -- i.e., paper-shuffling.

Recognizing the rate of change in business today and the promise of the Internet to accelerate it, eProcurement is likely to evolve from a matter of cost-saving and competitive advantage to being a critical component in a company's survival.

Richard T. Roth is managing director of Hackett Benchmarking & Research, part of Answer-think.

[Graph omitted]