As the global economies flex and strain, so businesses plan and counter the ever-changing world in which they trade. The current subprime mortgage scenario ripples ever outwards, suppressing lending and challenging interest rates. Corporations look to new markets, leverage existing channels and reduce spend to lean out operations and weather the storm surge radiating from its US epicentre. Focus turns once more to maintaining financial performance and cost reduction. In such turbulent times, shaving costs that go straight to the bottom line is the late-night conundrum of many a CFO. Reducing service or manufacturing costs versus increasing sales is a key equation.
As global companies seek opportunities to reduce costs, improve efficiency and deliver goods and services more quickly, procurement is increasingly becoming a prime focus for executives who strive for those bottom-line savings. In the procurement sphere, the technique of e-sourcing is emerging as a strategy that delivers double-digit percentage cost reductions for multinational companies. With these savings having immediate impacts on the bottom line, it is an attractive proposition for CFOs.
More and more businesses are recognising the potential in having an e-sourcing strategy. There is increasing momentum to install a streamlined, robust sourcing process for supply of goods and services throughout supply chains. Even businesses that are not e-sourcing are increasingly likely to become involved as a supplier in someone else’s negotiation by e-auction.
E-sourcing can be used effectively on enterprises’ high-value/low-volume spends through to low-value/high-volume categories. Analysis will determine where any given company’s procurement talents should be focused to best effect, having a combined strategy of in-house talent taking the high-value or business-critical areas with an outsourced approach to the lower value.
E-sourcing services can also be used on a managed-service basis to support specialist, infrequently negotiated categories, such as energy, or where current taxation policy knowledge may be required.
The e-sourcing technique, supported with e-enabled processes, provides procurement departments with the ability to reduce their sourcing cycle times, widen their global supplier search and increase operational efficiency. The time saved can redirect procurement talent to apply strategic sourcing to a greater portion of the spend. This leaves them with more time to focus on important aspects such as quality and supplier management, using those retrieved skills to manage the contract, and reduce ‘creep’, substitutions, service variance and updates as organisation requirements change. All these key functions are a daily challenge to busy procurement departments.
With procurement talent working more closely with suppliers, their market knowledge increases, allowing greater interpretation/definition of demand and supplier improvements. The ability to reduce sourcing cycle time also directly translates into faster time-to-market of the enterprise’s commodities or services.
E-sourcing can also be used tactically to achieve quick savings. Any business that has not yet adopted an e-sourcing strategy should be able to achieve a return on investment (ROI) within six months of the negotiated contract being awarded. The formulation of a spend reduction programme (SRP) to identify categories and expenditures, along with contract renewal dates, provides the core data that an e-sourcing consultant can assess to identify potential opportunities.
E-sourcing provision can be obtained either from inside the enterprise business system or externally on a self-service or managed-service basis. Many organisations have defined an e-sourcing component with their forward IT systems strategy. This brings the e-sourcing tool within the business system, allowing integration with financial data, contract management and core purchasing systems. The integrated approach allows online spend analysis, optimisation and contract performance monitoring. However, achieving this integrated vision can often be a timely experience.
An alternative is to acquire the e-sourcing capability through an independent provider that offers e-sourcing on demand. While interfaces can be written to incorporate this into the business system, the e-sourcing process can happily run on a standalone basis. Arguably, there is little data that must be transferred across, so the ‘source to contract’ award can be used very effectively in this configuration.
Costly enterprise systems requirements and constraints are driving the market to a hybrid e-sourcing model, which combines a self-service application with outsourced category expertise, methodologies, and sourcing-event management services that can be accessed as needed.
The availability of web-based subscription services provides e-sourcing capability on demand, allowing organisations to deploy the tool rapidly. This self-service approach provides a low cost of entry and rapid ROI on e-sourcing solutions; and this ‘fast start’ option to deploy e-sourcing gives early access to the significant, quantifiable, tangible benefits.
Practice has demonstrated that price reductions continue to be achieved even when a contract is renegotiated two or three times. While the price reductions achieved through a negotiation-focused e-sourcing strategy will logically eventually diminish over time, the act of retaining advantage through the creation of a live, responsive, immediate bidding environment can only benefit all parties. It maintains the competitiveness in the negotiation. Suppliers welcome the openness and transparency. Many suppliers have said that they regard the e-sourcing process as a fairer and more equitable process of negotiation.
Steve Watts is CEO of Source42, a professional procurement services business with a specialisation in e-sourcing.
SAVINGS TO BE MADE VIA E-SOURCING
Astonishing savings on inert categories such as stationery spend are well documented thanks to the use of e-sourcing: 65% savings have been achieved. Many other categories have seen similar high-percentage gains.
A correctly structured and executed e-sourcing strategy can enable savings of between 15% and 50% across a wide range of categories. For the sceptical, take the opportunity to join a live e-auction viewing and watch as the bidding commences and millions roll off the spend.
A number of companies have achieved rapid return on investment (ROI) by implementing such a strategy. Peter Shirtcliffe, head of procurement at leading airline bmi, says that the airline achieved ROI with the first two minutes of its first e-auction. “We have a very clear e-sourcing strategy that delivers benefit to the business,” he says.
E-sourcing does not detract from best-practice procurement. It is not a case of cutting corners or reducing service levels or quality to achieve gains.
E-sourcing supports good procurement process, and provides enterprise-wide standardisation and enforcement of practice. Some organisations include e-sourcing as a foundation of their total cost management strategy.