: Buying Power -- As online marketplaces proliferate, businesses need to move
fast to get E-procurement systems up and running. Software and services vendors
can help speed the process.
Mar. 31, 2000 (InformationWeek - CMP via COMTEX) -- When Purdue University flips
the switch on its $4 million E-procurement system this month, the school will
begin closing the book on three decades of manual procurement procedures on
paper. But Purdue didn't graduate to the world of online purchasing without
help. Only through a collaborative effort with Deloitte Consulting and Ariba
Inc. will the university's thousands of faculty and staff throughout the state
of Indiana have the power to procure goods and services with the swipe of a
card.
"We didn't have the technical resources to do this alone," says Mike Courtney,
manager of the procurement-redesign project at Purdue-which, he emphasizes, is
an educational institution, not an E-business. Deloitte's planning and
implementation services, coupled with Ariba's Operating Resource Management
System (ORMS) software, played an important role in bringing the system up in
nine months.
As online business-to-business marketplaces become more accessible, there's an
advantage to scrapping manual procurement methods in favor of Web applications
that allow access to Net trading communities and lower purchasing costs through
(COMTEX) B: Buying Power -- As online marketplaces proliferate, busin
B: Buying Power -- As online marketplaces proliferate, businesses need to move
fast to get E-procurement systems up and running. Software and services vendors
can help speed the process.
Mar. 31, 2000 (InformationWeek - CMP via COMTEX) -- When Purdue University flips
the switch on its $4 million E-procurement system this month, the school will
begin closing the book on three decades of manual procurement procedures on
paper. But Purdue didn't graduate to the world of online purchasing without
help. Only through a collaborative effort with Deloitte Consulting and Ariba
Inc. will the university's thousands of faculty and staff throughout the state
of Indiana have the power to procure goods and services with the swipe of a
card.
"We didn't have the technical resources to do this alone," says Mike Courtney,
manager of the procurement-redesign project at Purdue-which, he emphasizes, is
an educational institution, not an E-business. Deloitte's planning and
implementation services, coupled with Ariba's Operating Resource Management
System (ORMS) software, played an important role in bringing the system up in
nine months.
As online business-to-business marketplaces become more accessible, there's an
advantage to scrapping manual procurement methods in favor of Web applications
that allow access to Net trading communities and lower purchasing costs through
the aggregation of spending power. But it's not easy. Many companies lack the
resources, technology skills, or time to get an E-procurement system off the
ground.
To get in on the action, companies such as Cargill, FedEx Express, Great-West
Life and Annuity Insurance, and Sabre are turning to software vendors, systems
integrators, and Internet marketplace creators for help. These companies
automate the requisition, purchase-order creation, and payment processes and
help clients develop plans for managing sourcing and logistics. Sourcing is the
process through which companies determine which suppliers best meet their
procurement needs.
"From an end-user perspective, it's very difficult to implement an E-procurement
system without the help of a services company," says Lisa Williams, program
manager for business-to-business E-commerce at the Yankee Group. "Relationships
between seller and buyer, between buyer and market, and between buyer and
technology are complicated, not just in terms of implementation but in terms of
sourcing strategy."
E-procurement services also help deliver a return on investment by ensuring that
the software is properly installed and integrated with a company's back-end
systems, negotiating supplier contracts, and providing an interface that lets
buyer systems communicate with their suppliers' systems. Another perk: Many
providers of E-procurement services offer training and education in the systems
they help implement.
"Rapid return on investment includes training in the areas of how new business
processes will work and how to use the new software," says Robin Palmer, senior
VP of supply-chain management at KPMG Consulting, which trains its consultants
and clients on Ariba's ORMS, SAP's Business-to-Business Procurement, Oracle's
Internet Procurement, and, by the fourth quarter, Intelisys Electronic
Commerce's products. "The market is critically short of skills to perform the
services work necessary to get an E-procurement system up and running," Palmer
says. KPMG has more than 300 consulting professionals dedicated to
E-procurement.
CEOs are demanding more in terms of procurement, but IT is tapped out when it
comes to strategy, says Lawrence Kohn, president and CEO of EDS CoNext, a wholly
owned EDS subsidiary. CoNext, which includes supply-chain management specialists
from EDS's A.T. Kearney subsidiary, works with companies to establish
E-procurement strategies, including supplier selection and implementation. "In
the end, the customer should be able to take advantage of new supplier
relationships and new, lower pricing models," Kohn says.
Companies appear to be buying into the services model. Services revenue
associated with E-business software, including E-procurement, is projected to
reach $5 billion by 2003, up from $441 million last year, according to Forrester
Research. Revenue for the total U.S. E-commerce services market, which includes
strategy, marketing, design, and technical services, is projected to reach $64.8
billion by 2003, up from $10.6 billion last year, according to the research
firm.
Still, not all companies are convinced that E-procurement services are the way
to go. Some, including financial-services firm Chase Manhattan Corp. and
semiconductor maker Texas Instruments Inc., say E-procurement is best handled
in-house (see story, p. 70).
E-procurement is a broad area that incorporates the automation of traditional
procurement processes such as electronic data interchange as well as Web-enabled
capabilities, says John Ferreira, co-leader of Deloitte Consulting's E-business
buy-side procurement practice. A Deloitte study published last year indicates
that more than 90% of companies have already incorporated E-procurement into
their business plans.
Return on investment is realized in three primary areas: reducing the expense of
procuring items because they're less expensive when purchased through Internet
marketplaces; reducing the cost of processing transactions by eliminating the
need for paper documentation; and improving organizational effectiveness,
because a company has more control over what's ordered and who's doing the
ordering.
Purdue's Courtney says it's hard to project E-procurement's ROI, and it's
difficult at the outset to compare the cost of hiring a services firm vs.
implementing a software package in-house.
Still, Purdue expects to realize savings of up to 7% by automating its
procurement processes simply through more favorable supplier agreements and a
reduction in staff needed to work on procurement. To put these costs in
perspective, Courtney says, Purdue spends $30,000 a year on postage alone to
mail checks to suppliers.
Courtney expects to spend about $700,000 annually to maintain the E-procurement
system, particularly on hardware, software, and ongoing services. Purdue will
also measure ROI in terms of buyer and supplier satisfaction, cycle-time
reduction, and greater control over spending, in addition to cost savings.
To streamline its automated E-procurement system, Purdue will distribute
MasterCard-branded purchasing cards that limit the amount individuals can spend.
About 1,000 users in four major areas of the university-the chemistry school,
aviation technology school, physical facilities maintenance plant, and the North
Central campus in Westville, Ind.-will receive the cards at the program's
launch.
After successful completion of a three-month pilot, Purdue plans to roll out the
cards to 2,000 more users a month. By the time the Purdue system is fully
implemented this summer, 15,000 faculty and staff members will be able to use a
Web browser for requisition and approval of various commodity items.
"The system implementation is the easy part; the hard part is the culture
change, process change, and enhancement of the security foundation," Purdue's
Courtney says. "This is the first Web-based administrative system to be
implemented by Purdue." The goal: eliminate 80% of paper processes within the
first two years.
Since it first developed a strategic sourcing plan three years ago with the help
of A.T. Kearney, FedEx Express, a Memphis, Tenn., subsidiary of the $14 billion
FedEx Corp., has come to realize that an E-procurement system is crucial to
running its business. "We figured we're big, we can aggregate our spending. But
we soon realized we didn't have a system to make the model work," says Scott
Struminger, managing director of global supply-chain integration at FedEx
Express.
One of the first hurdles Struminger faced was making an ROI case to his CIO.
"When you don't know how much you'd spend in an online marketplace, how do you
predict how much you're going to save?" he says.
Although FedEx had the luxury of IT resources for its E-procurement system
implementation, it didn't have the luxury of time. The company hired KPMG about
a year ago to help with the implementation work, then moved quickly to bring
Ariba on board at KPMG's suggestion. The goal was to launch within 90 days.
KPMG's role was to help FedEx select a software provider, then to assist the
courier with systems integration. Having had experience implementing Ariba's
ORMS software, KPMG was able to work with FedEx's IT staff to integrate ORMS
with a PeopleSoft ERP system running on an HP-UX V-Class server. ORMS runs with
an Oracle database on an HP-UX K-Class server.
"KPMG's primary contributions can be measured in terms of knowledge transfer and
the creation of documentation," Struminger says. Although Struminger won't
disclose how much FedEx paid for KPMG's services, he says his company was
charged a fixed hourly rate for the project, which lasted about 250 hours.
FedEx launched its E-procurement system last June involving 5,000 users in the
company's IT department. Their job is to test hardware and network performance,
as well as connections to FedEx's suppliers, through the purchase of commodity
items. FedEx expects its E-procurement system to reduce spending by as much as
30% a year on a number of commodity items and services such as PCs, office
supplies, temporary services, and catered meals by linking directly into Ariba's
central ORMS interface. With several billion dollars spent on commodity items
and services each year, savings are estimated to be in the millions of dollars,
Struminger says.
One of the most significant benefits of the project came as soon as the switch
was thrown, Struminger says. "We were able to attract new suppliers and create
competition for our original suppliers," he says. "When they heard FedEx was
implementing E-procurement, they discounted their products by percentages in the
double digits."
Long-term, the ability to change employees' spending habits will ensure a
healthy return on investment. FedEx's E-procurement system is currently
available to all of its 140,000 employees in the United States. The company is
planning a European implementation in June, modeled on the U.S. system.
While the benefits of E-procurement services are enticing, companies shouldn't
jump in-they should choose their providers with care, says Kevin Costello,
digital markets leader at Arthur Andersen, which does consulting work for
E-procurement. First and foremost, companies should look for a provider whose
consultants understand not only the technology, but specific business
requirements. One way to save time and money out of the gate is to avoid
building highly customized systems. Says Costello, "Many packaged
implementations can be customized later."
KPMG Consulting's Palmer says companies shouldn't focus on technology first, but
rather on the business issues at hand. "What are you trying to do from a
business perspective? Focus on the big picture, and usually the technology
decisions will fall out of that," he says.
Service companies should be proficient in designing and implementing performance
measurement, legacy and ERP integration, change management, program management,
and integration with the Web and protocols such as the Extensible Markup
Language. "Clients should keep in mind that they're implementing iterative
improvements that grow over time," says Palmer.
Other matters to consider include: how easy the system will be; the total cost
of ownership, including maintenance and ongoing fees; the time for
implementation, which depends on the size of the company and the complexity of
the implementation; and whether suppliers will embrace the new approach.
A software or consulting firm's track record in implementing E-procurement
initiatives should also enter into the equation. Analysis of a consulting
company's competence should be considered both on the organizational and
individual levels, Palmer says. "Many potential clients will check not only a
company's references, but references for individual consultants who work on the
project," he says. "A consultant must be knowledgeable on [a customer's]
technology to successfully complete the implementation."
A company's good experience with a particular software vendor can translate to a
services engagement. Great-West Life & Annuity Insurance Co., a $2.7 billion
Denver provider of managed-care, life, and disability insurance and defined
contribution plan services, chose Remedy Corp. to provide services for Remedy's
Purchasing@Work software. Purchasing@Work will serve as the underlying platform
for Great-West Life's E-procurement initiative, primarily because the insurance
company already uses Remedy's help-desk software, says Graham McDonald, VP of
corporate finance for Great-West Life.
Rather than hand off the entire project to the software vendor, Great-West Life
conducted research regarding the cost benefits of an E-procurement system,
selected Remedy, and developed its own implementation plan. When it came time to
deploy the software, Great-West Life let Remedy step in because of the software
company's expertise with the product. "We might have been tempted to do the
implementation work ourselves," says McDonald, "but Y2K has created such a
backlog in our IT department that we didn't want to dedicate a lot of our
internal resources to E-procurement."
By the end of this month, Great-West Life plans to roll out a pilot
E-procurement program that will automate the purchase of office supplies.
Remedy's work on Great-West Life's E-procurement project will extend into the
fourth quarter, when the software vendor is scheduled to integrate the front-end
E-procurement system with Great-West Life's back-end enterprise systems.
McDonald says his company negotiated a fixed fee for Remedy's services, separate
from the cost of buying the Purchasing@Work software. An internal E-procurement
system implementation wouldn't have been less expensive, says McDonald, because
of the learning curve required to properly implement and operate Remedy's
product.
For Cargill Inc., a privately held distributor of agricultural, food, financial,
and industrial products and services, the search for partners with the
technology and experience to deploy an E-procurement system began in 1998.
Unable to find a software package that was easy to implement and manage, and a
consulting company that could put the pieces of the project together, the
Minneapolis company waited until the following year to begin evaluating its
options seriously, says Gary Klco, Cargill's senior purchasing manager in
corporate procurement.
After selecting Ariba ORMS last October, Cargill put together a project team and
brought Deloitte Consulting on at Ariba's suggestion. Experience and reputation
were the reasons Deloitte was chosen. "Deloitte had some experience with Ariba
implementations, and it's hard to find experience at this stage of the
software's maturity," says Klco.
Charging on a fixed hourly rate-an arrangement proposed by Cargill-Deloitte
worked with Cargill's team in project management, supplier-catalog optimization,
and technical implementation. As these tasks neared completion, Deloitte was
increasingly relied upon to transfer product and process knowledge to Cargill's
IT staff. At the height of the project, Cargill worked with five or six Deloitte
consultants, and by the end of June, Klco anticipates Deloitte will hand over
the entire project to Cargill's team.
Even companies that have an internally developed E-procurement system can at
some point need outside help. Using its own, internally conceived and created
E-procurement system as a stepping stone, Sabre Inc., the $2.4 billion Fort
Worth, Texas, provider of IT technology and services for the travel and
transportation industry, plans to create a marketplace by the end of June that
provides a trading forum for customers. While Sabre had the expertise in-house
to establish the basics of an internal E-procurement system, the company is
considering professional services firms and software vendors to help design and
develop applications for supply and purchase in its new marketplace, says Stan
Ratcliffe, senior VP of Sabre Technology.
The growing demand for E-procurement is attracting companies not traditionally
involved in E-services, including software and hardware vendors (see story,
below).
E-procurement software developer Commerce One Inc., for example, is expanding
its offerings to provide hosting services and high-level business consulting,
which includes developing business models for online exchanges.
While Commerce One doesn't provide the full spectrum of E-procurement and
Internet market services, the vendor acts as a facilitator of services. "It
becomes a complex project when multiple service providers get involved, but it's
hard to source just one partner for these projects," says Roy Satterthwaite, VP
of Commerce One's MarketSite.Net, a portal for exchanging goods and services
among businesses worldwide. "A lot of companies like to have a primary
consulting firm of record."
Ariba, which counts more than 70 business customers using its E-procurement
software, is also an advocate of sharing project responsibilities. The company
partners with systems integration firms on all its engagements, says Kirk
Cruikshank, Ariba's executive VP.
Ariba's internal services organization consists of 200 employees whose role is
to help customers define project management, develop a rollout plan, and
transfer product knowledge to a systems integrator. "The majority of customers
want to know that they have a technology partner who can take them from
E-procurement to Net marketplaces," says Cruikshank.
Internet business-to-business marketplace creators such as DirectAG.com,
SupplierMarket.com, and Ventro use E-procurement systems as the foundation for
their services. Ventro Corp., an Internet marketplace creator for the
life-sciences industry, builds and operates vertical marketplaces, including
Promedix, which specializes in medical supplies; Broadlane, a joint venture with
Tenet Healthcare that specializes in health-care commodities; Industria, a
fluid-processing joint venture with DuPont that supplies pipes, valves, and
fittings; and Chemdex, which supplies products for research scientists.
More than simply managing these Net markets, Ventro offers a technology platform
that extends into its vertical markets. "We're essentially a services company
because we take ownership of the Net market system for our customers, which
include suppliers and buyers," says Martha Greer, VP of marketing at Ventro.
Part of this service is MarketLink, middleware written by Ventro that uses XML
and EDI to integrate customer marketplace sites with E-procurement systems.
MarketLink provides connectivity and integration throughout the purchasing
process, from requisition generation to order submission, invoicing, and
payment.
One of the differences between marketplace creators and software and service
providers is that marketplace creators take ownership of the process once the
E-procurement software is implemented. If an order isn't fulfilled, for example,
the customer will contact Ventro, not Ariba, Commerce One, or the consulting
firm they used, Greer says.
The primary advantage of this approach is that it coordinates the components of
marketplace building or participation through a single source. Marketplace
creators are also specific to a particular industry. "Without our
vertical-market expertise, we're not adding value," Greer says.
When considering a partner in the Net marketplace space, clients should consider
whether or not a particular creator will take responsibility for the
implementation and performance of the system's various components, including
software and supplier relations. The choice of marketplace creators is limited
today, but this is expected to change as more companies look to build online
trading communities within their vertical industries. The proliferation of these
markets is reason enough to choose a services and technology partner carefully.
"There are going to be some spectacular disasters in the Net marketplace and
E-procurement space, with people taking the technology hammer to every nail to
solve all their procurement problems, much like they did with ERP," says Jim
Hine, a managing director in Computer Sciences Corp.'s Consulting Group
responsible for procurement.
The key to avoiding disaster is to know when to partner-and which partner is
best suited to meet a company's E-procurement needs. Ultimately, the business
should feel confident that its services partner, regardless of which area of the
market it's coming from, has the resources to meet the evolving needs of the
E-procurement implementation.
---
The Upshot
When choosing a services organization to help plan, implement, and integrate an
E-procurement system, consider the following:
-Do you have the internal resources to complete an E-procurement
implementation?
-How quickly can the service provider get your proposed E-procurement system up
and running?
- How well does the provider understand your business requirements?
-What is the service provider's level of experience implementing the software
package your company has chosen?
-What track record does the services organization have in helping reduce
spending within certain commodity groups?
DATA: INFORMATIONWEEK
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