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-sourcing could save your business trillions

~ well, we would say that, wouldn’t we? ~ 

Wait a minute before you dismiss what is blatantly yet another wildly exaggerated industry prediction.

The figures quoted - $1.7 trillion to be exact - come from the Aberdeen Group, which state that by deploying Internet-based sourcing, businesses could save more than $1.7 trillion on a global basis. Of course that’s aside from the additional benefits of shorter business cycles (reduced by 25-30%), lower administration costs (5-10% on average) and faster time to market for new products (reductions of 10-15%), that e-sourcing can bring..

So far, so familiar? Of course by now the dot-com rise (heady days when it seemed like anybody with enough nerve, ambition and the obligatory khaki trousers could become an overnight stock market darling) and subsequent fall, have been well documented. Apart from the roadside casualties, the bursting of the Internet bubble has meant that a healthy dose of scepticism is now applied to the pre-fix ‘e’. Once upon a time it meant ‘How soon ‘till we float?’; now it means ‘I’ll believe it when I see it.’

Well, if it’s proof you want…consider this. Belgacom is quoted in the press as saying that it shaved $1.8m off its procurement process costs, thanks to Web-enabled technologies. Its average cost of processing a purchase order has been reduced by 75% per order and lead days have been reduced from seven days to two. Even the early adopters (in Internet years an ‘early adopter’ is deemed circa 2000) of e-procurement, such as Reuters, Cisco, HP, Visa, Philips and Honeywell claim a return on investment in less than 12 months.

How? Because the principals involved in e-procurement are relatively straightforward and merely enhance existing processes.

Most organisations save money by adopting a purchasing strategy; e-procurement uses the Web to deliver this strategy. It cuts cost for both buyers and suppliers by automating the purchase and supply process and by reducing the one off ‘maverick’ buying decision outside preferred supplier agreements. These lower costs mean a healthier bottom line (thus better customer and shareholder perception), often leading to bigger and better market opportunities.

And there are many possible options for the newcomers to this practice. There are ‘catalogues’, which are e-versions of existing supply catalogues. There are also marketplaces (vertical, horizontal, private, public, hybrids). In most cases though, the budget management, requisition authorisation and goods received paperwork (and sometimes payment) can all be completed electronically. In many cases, tendering, contracting and opportunities for online auctions also feature.

But this is only half the story. Business moves fast; the Internet moves even faster. The really smart company is now talking about e-sourcing and e-purchasing - not just e-procurement. And there’s a fundamental difference.

A good place to start would be a dictionary definition. Source; noun; the point or place from which something originates. In other words, really getting to grips with the basics of your business.

E-sourcing is all about taking a long hard look at understanding the right products and the right vendors for your business, then building a more long term environment or framework around choosing your vendors and maximising the work you do with them - not just buying something when you need it.

Aberdeen defines it as (take deep breath): ‘the process of utilising Web based technologies to support the identification, evaluation, negotiation and configuration of products, suppliers and services into a supply chain network that can efficiently respond to changing market demands…It is during the sourcing cycle that an organisation defines the overall cost and structure of its products and its supply network.’

The italics are the author’s own, put there to demonstrate that e-procurement is merely the first wave of a company’s Web strategy; the next logical step is e-sourcing, and it is this shift which will separate the men from the boys. But it won’t always be easy. 

The first generation of Internet users, certainly in terms of what we’re talking about here, were almost exclusively concerned about its external use – creating an exchange of like minded buyers and sellers that existed outside of the business; e-procurement, at its most fundamental level, is about automating what paper used to do. (What used to get pushed manually now gets pushed electronically throughout an enterprise.)

But when you talk about e-sourcing, it’s about automating the way people make decisions (an internal process), which will require a new mindset. The target groups are purchasing and sourcing managers, whereas e-procurement can be accessed and used by every employee in the company. 

The focus is on the sourcing process, such as supplier selection, negotiation and contracting, which in turn requires collecting data, analysing the data… then implementing it and negotiating and managing that supplier relationship. Only then does procurement kick in - transacting with the vendor,  either directly following the e-tender (RFx) stage or through an online auction.

None of this comes without its challenges. These include the data ‘cleansing’, subsequent management and analysis of existing product and supplier information, and the desirable ultimate goal of integration into existing business (ERP) and IT infrastructure. 

But the potential for benefit is enormous. AMR has calculated that the e-sourcing market will be worth an estimated $3 billion in just a few years. The next step, for companies such as ours, is education - advising companies of the differences between sourcing and procurement. After that, it’s a case of: how can we help them take their slice of the $1.7 trillion pie?

Gerald Heydenreich is CEO of Portum, Europe’s leading e-procurement solution and services provider. The company was founded in 1999 and has financial backing from large corporate investors such as Accenture, Henkel, and the Venture Capital company 3i Group. The company has partnerships with Accenture, Microsoft and Dun & Bradstreet. It’s headquartered in Frankfurt with further subsidiaries in London, Paris, San Francisco and Madrid, and employs nearly 100 people across Europe and the US.