Study: Companies Save Big Bucks by Automating Procurement

 
 
By Jacqueline Emigh  |  Posted 2005-02-09
 
 
 
Organizations can save a lot of time and money by automating procurement, or the buying and sourcing of goods and services, according to some analysts. In a new report, The Hackett Group is releasing findings that "world-class" procurement executives—those rated as most effective and efficient—invest substantially more money in IT than their peers, while actually spending less overall and operating with a smaller staff.

World-class procurement organizations are more than twice as likely as other companies to make high use of sophisticated reporting tools for spending analysis, said Christopher Sawchuck, senior business adviser at Hackett, in an interview with eWEEK.com.

They also use online tools to communicate requests for information, proposals or quotes 78 percent more often than other organizations.

How did Hackett reach its results? By conducting benchmark studies of Fortune 100-level companies and then analyzing their costs of procurement across 10 business processes. Costs considered included labor, technology, outsourcing and "other," a category that encompasses facilities and travel costs, for instance. "The procurement people might be spending a lot of time flying around the country, for example," Sawchuck said.

Findings showed that the world-class executives—or those deemed by Hackett to be in the top 25 percent, in terms of effectiveness and efficiency—dedicate 19 percent of their total operational spending to technology, as opposed to only 11 percent for other procurement executives.

Put another way, world-class companies invest 94 percent more on "technology per labor dollar" than their less automated peers.

Also according to the report, the world-class executives invest 27 percent more money in technology—$1.4 million versus $1.1 million per billion of spending—but use 38 percent fewer employees and spend 27 percent less on total procurement operations.

But are salaries lower in these world-class procurement organizations, too? "No. Salaries are actually higher," Sawchuck told eWEEK.com. Generally speaking, the companies spend more of their labor dollars on "highly productive individuals" who perform value-added business processes in decision management and risk management; supplier management and development; sourcing strategy and analysis; compliance management; and product development support.

MasterCard streamlines its procurement process. Click here to read more.

On the other hand, the world-classers use technology to automate "operational support" processes traditionally performed by lower-cost personnel. Examples include requisition and PO (purchase order) processing, scheduling, receipt processing, supply data management, and sourcing execution.

Hacketts benchmarks and analysis focus more on the processes being automated than on how they are being automated. So some of the organizations using online procurement tools might be doing so through business exchanges, while others deploy either on-site or ASP (application service provider) implementations, according to Sawchuck.

Also, the research doesnt address specific vertical markets. Sawchuck acknowledged that there are some niche players in the procurement space with industry-specific solutions for the services and printing markets, for instance.

He added that some best-of-breed supply chain vendors such as Ariba Inc. and i2 Technologies Inc., as well as ERP (enterprise resource planning) vendors such as Oracle Corp. and SAP AG, "may have modules that are specific to particular industries."

"[But] our preference has been to look at cross-industry trends," Sawchuck told eWEEK.com. "In procurement, practices are fairly industry-transparent."

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