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The power and promise of Web-based procurement tools

Comment
Web-based spend management solutions can help companies achieve double-digit savings, but software can't do the job alone. To get the best results, companies must balance individuals' expertise with technology.

In 2009, when I wrote the white paper Riding the Crest of a New Wave: How the Original SaaS Companies Have Gained the Upper Hand, it became clear to me that a paradigm shift in vendor solutions had already been well under way as far back as 2000. The basis for this assertion was my discovery of a 2001 Software & Information Industry Association (SIIA) white paper called Strategic Backgrounder: Software as a Service.

In my own paper, I referenced SIIA's report, including its statement that "packaged desktop and enterprise applications will soon be swept away by the tide of Web-based, outsourced products and services"—a development, I wrote, that established the core principles or elements of the software-as-a-service (SaaS), or on-demand, model.

While there are various pricing structures, the SaaS model is different from traditional software licensing agreements, in that a customer only pays a transaction fee based upon actual usage, as opposed to having to make a large capital investment upfront. From an implementation standpoint, SaaS solutions can be operational within a matter of weeks, if not days. This is a major advantage over something like an enterprise-type solution, which can take up to several years to implement.

The SIIA paper concluded that the emergence of the new model would remove the responsibility for installation, maintenance, and upgrades (and the associated heavy costs) from overburdened management information systems (MIS) staff. As a result, the paper predicted, "packaged software as a separate entity will cease to exist."

Although the SIIA report stressed at the time of its publication that due to "technical and business issues" such drastic predictions had not yet come to pass, it nonetheless had sent up the first flare warning that a very significant change was about to happen.

This third-party confirmation of the SaaS trend is significant because it challenged (and still challenges) the mainstream pundits who question the viability of these new platforms. While some have begun to change their views, there are many who consider SaaS-based spend management solutions (the subject of this article) to be "nothing more than Madison Avenue buzz terminology designed to shoot some Botox into a segment of the spend management market" and think that references to the type of market shift identified by SIIA are somehow "misleading."1

This is an important point, as anyone (myself included) who takes the position that spend management solutions are capable of delivering double-digit savings—subject, of course, to an individual organization's purchasing practices, both past and present—would have to prove that the prerequisite technological breakthrough is in fact real. If, as the above-referenced pundits maintain, the new spend management solutions are nothing more than vacuous marketing "sizzle," then the prospects for savings, let alone sustained savings, become highly questionable, and the discussion would have to shift from one of leveraging new technologies to one of discovering why existing platforms have consistently failed to produce the expected results.

Not by technology alone
One of the key positions championed by the naysayers regarding SaaS-based spend management solutions is that obtaining true spend intelligence is solely dependent upon the expertise of individuals to gather, synthesize, and analyze the data, and then produce meaningful insight and results. If this is in fact the case, then why are these same "experts" hard-pressed to explain why the great majority of technology-based e-procurement initiatives fail to achieve the expected savings?

There is no shortage of articles and reports pointing to a high failure rate for spend management initiatives that are based on the traditional, enterprise resource planning (ERP)-centric licensing model. The actual rate of failure is subject to debate; some observers place it at more than 50 percent while many others say it is as high as 90 percent. The reason for the discrepancies is that most e-procurement undertakings are part of larger ERP-based implementations. This makes it difficult to narrow the analysis to a supply chain management (SCM)-only problem. That said, reports from research organizations such as the META Group (now part of Gartner), which in 2001 estimated that 70 percent of SCM technology projects had failed, to the more recent 2007 Toolbox.com article, which reported that 90 percent of such projects "fail to deliver any ROI (return on investment)," are nonetheless disconcerting.

Given that abysmal track record, it should come as no surprise that many people consider the low-cost, pay-per-use SaaS models to be the solutions of the future—or that many companies are already adopting them. The fact that some ERP vendors have abandoned their traditional business model in favor of offering an on-demand solution testifies to the monumental shift to SaaS that is now under way.

Of course the impact and effectiveness of any technological breakthrough are to a certain degree dependent upon the proper application of data to make informed decisions. Yet without the new technology, no amount of internal expertise would have produced the double-digit savings some companies that use these solutions have achieved. This is because with traditional spend management applications, the mere extraction of the required data proved to be a laborious exercise that failed to produce meaningful intelligence on a timely basis. Put another way, SaaS-based spend-intelligence solutions make meaningful data readily accessible to anyone and everyone associated with the purchasing function—not just the individuals who have the level of expertise required for data extraction and analysis with traditional software applications.

That said, it is important to note that I am not suggesting that technology, no matter how advanced, will in and of itself lead to savings without the active involvement of knowledgeable and engaged purchasing personnel. Instead, it is the combination of the timely access to spend intelligence afforded by new Web-based platforms and the ability of individual purchasing professionals to properly apply that information that drives savings.

This, as it turns out, is the linchpin—the critical factor that makes possible the transformational cost savings that have eluded so many organizations that rely on traditional ERP-based applications in their spend management quest. To illustrate my point, let's consider the case of an organization that achieved double-digit savings over a multiyear period.

The Department of National Defence (DND) in Canada struggled with poor service-level agreement performance and escalating costs associated with the procurement of indirect materials.

With the introduction to the purchasing process of a Web-based, pay-as-you-go solution, frontline buyers were able to leverage both key historical value indicators (past delivery performance and product quality) and real-time value indicators (such as current product costs and factors affecting price) to select the right vendor 98.2 percent of the time.

A particularly telling example of the impact of real-time value indicators (information that previously was not available to the DND) involves the relationship between product cost and the time of day a product was ordered. Trend analysis using the new software demonstrated that a particular maintenance and repair part that was sourced at 9:30 a.m. might cost C$130. If the same product was sourced at 3:30 p.m., it was not uncommon for the cost to rise to as much as C$1,000.

Because this data was available to buyers as part of the purchasing process (as opposed to becoming available through an adjunct, after-the-fact reporting function) the DND used this information to its advantage when making purchasing decisions, and thus realized significant gains. These included:

  • An almost immediate improvement in next-day delivery performance, from 53 percent to 97 percent of all orders arriving at the appointed destination within 24 hours;
  • A year-over-year cost-of-goods savings of 23 percent for seven consecutive years; and
  • A reduction in headcount over the first 18 months, from 23 buyers to three buyers.

An interesting point: despite the impressive results in the areas of delivery performance and cost reduction, it is the third point of savings that has garnered the greatest attention. In light of the DND's recent announcement that the agency would be cutting 2,300 positions from its present workforce, one can understand why.

Situational circumstances driven by external factors (such as a struggling economy) notwithstanding, it would be erroneous to assume that a reduction in headcount is a primary savings component, because technology **italic{empowers} an engaged workforce, as opposed to replacing or reducing it. This is not to say that there are no instances in which a reduction would be warranted, as demonstrated by the DND example. However, to blindly believe that automation alone will enable an organization to reduce its workforce, and do so in a window of time that is commensurate with immediate financial concerns, is pure folly.

In the DND's case, reducing headcount was a by-product of increased efficiency that had been achieved not just through automation but also through a solid understanding of the logistical elements needed to meet a service-level agreement's demanding requirements. It was only after the SaaS solution had been successfully implemented and had begun producing the expected results over a 12-month period that the organization could strategically consider eliminating personnel, and then act upon that plan.

Achieve the right balance
When organizations put workforce reduction at the top of the savings list, it negatively skews their focus, creating an over-reliance on technology that, as previously discussed, rarely delivers the expected savings.

In this context, it is the sustainable savings that are directly and predominantly linked to cost-of-goods reductions that should be the primary focus of any initiative—not the one-time benefits like reduced headcount.

So what is the key takeaway relative to SaaS, or Web-based, procurement tools?

Because Web-based spend management solutions are better able to address market volatility, and thus ensure that organizations achieve the best value when acquiring materials and supplies, they are the effective means by which double-digit savings can be realized.

However, the key to realizing said savings are and always will be based on ascertaining and achieving the all-important balance between purchasing personnel's capabilities and those of emerging Web-based technology.

Note:
1. Jason Busch, "Spend Matters" blog post (July 11, 2006)

Jon Hansen is the author of the blog "Procurement Insights" and host of an Internet radio show on business practices.

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