Features: May 30th, 2008

By Esa Tihilä.

eProcurement made slow progress in the early period following its launch ten years ago. As well as user unfriendly and not very reliable technology it called for substantial investment in time and money. There was also a skills shortage in using the systems. All this has changed and eProcurement is starting to deliver on its long-standing promise of more streamlined supply chains, better relationships with the right suppliers, and significant savings on spend. The public sector is leading the way in the take-up of eProcurement, because it is recognised as an effective way to make substantial contributions to efficiency savings targets. The author describes how the long promised benefits are now being delivered.

The latest generation of advanced eProcurement technology is enabling a whole new level of visibility and control within organisations and its positive effects are being felt throughout the financial value chain.

Surprisingly, one of the key sectors at the forefront of this innovation is the public sector. Results from department-wide – and in some cases, city wide – public sector deployments have been impressive, driving significant financial savings with new, more efficient operational models.

Why is public sector leading the way in innovation? Local and central government bodies are often tasked with improving efficiency and raising service standards – such as the 2004 Gershon Review in the UK, which set cost-reduction targets of 2.5% for every government body by 2008. Furthermore, public sector bodies are more constrained by external policies and procedures covering these activities. This drives the need to show a clear, auditable record of what has been spent, by whom, and on what.

So what can private sector organisations – and indeed other public sector bodies – learn from these examples? And how can they add more control and transparency in their operations and supply chain?

Overcoming the Obstacles

If you can’t see what your organisation is spending money on, then you simply do not have effective control over your procurement processes. Better management of corporate spending has to start with visibility of the problem.

At the zenith of the dot.com boom, when the concept of eProcurement and the associated benefits of cost savings and efficiency gains were initially developed, there were four major obstacles – time, money and the lack of skills in using such systems as well as the technology itself.

Software licences were very expensive and there was a significant cost and time implication involved in integrating the software with back-end systems. Things have however moved on for the better, and internal systems are now better equipped to deal with eProcurement, and the economics have swung definitely in favour of automation.

Electronic procurement solutions enable you to automate time-consuming and error-prone manual procurement processes which often result in poor spend visibility, lack of process control and wasted opportunities for optimising corporate spend and supplier relationships.

eProcurement software has been specifically developed to optimise procurement processes. An easy-to-use front-end interface coupled with advanced software functionality, which supports a high level of automation and overall compliance with corporate policies and contracts, all ensures full control and transparency from sourcing to purchasing.

Economics of e-procurement

Put simply, eProcurement has the ability to deliver significant cost savings. By identifying preferred suppliers that can offer the best pricing or volume discounts, you will be able to lower the cost of goods and services. This is particularly key for organisations with an indirect procurement model that deal with a wide range of suppliers and buy a wide range of goods and services. Another core benefit of the eProcurement model is that it removes the need to have goods in store “just in case”, freeing up capital and making the overall purchasing process more efficient and effective.

Public sector organisations – and many private sector counterparts – deal with tens of thousands of suppliers, with anything from nuts and bolts to toilet supplies to electricians or plumbing services. Ensuring an effective supplier relationship when dealing with a large number of suppliers reinforces the business case for eProcurement and e-sourcing applications as it helps to deliver greater visibility and control.

The alternative, decentralised approach to procurement will often lead to ad-hoc purchasing – driving costs up as a result of multiple smaller purchases and the time involved with many employees purchasing the same items for individual office or departmental use.

Imagine a scenario where each department or office head spends an hour approving and signing off a specific purchase – the time and cost involved in this multiplied across a public body or large organisation soon adds up.

Now consider the alternative approach of an automated, centralised procurement solution, which not only delivers significant time and cost savings, but also ensures the most competitive possible pricing through optimal leverage of existing supplier contracts. A reduction of just a few percent makes a huge impact on overall spend across the organisation.

Making real strides in efficiency

But eProcurement can deliver far more than just lower prices. The net impact of other key deliverables – such as better productivity, faster planning, greater visibility and the elimination of unplanned, ad-hoc buying, will result in a considerably higher overall return on investment.

Manual processes including approval logging and classifying act as a drag on efficiency, driving up costs and resulting in an inefficient use of corporate spend. A key focus of eProcurement is on making internal processes more efficient through the paperless processing of orders, receipts and invoices.

Organisations still have the reassurance that they have the budgetary control, visibility of spend and process transparency needed, but automation brings with it the additional benefit of freeing up time and resources and enabling staff to focus on other more strategic areas of the business, such as optimising supplier relationships.

eProcurement as a platform for organisational development

eProcurement can also be effectively harnessed as a business tool, in order to further refine and improve internal purchasing processes, and in turn deliver sustained and continued return on investment. A solution that can adapt and evolve in line with the organisation’s purchasing policies can be used to identify and help design improved business and procurement-led processes, leading to efficiency gains and increased transparency.

Organisations can start this process by analysing existing procurement processes one-by-one, and looking to streamline them. It’s crucial to consider the end user in all systems that are implemented – involving system-users in the design stage will help create a highly automated and easy-to-use solution that meets their needs, and most importantly, ensures they actually use the system. It’s impossible to manage spend or eliminate maverick spending without the buy-in of the entire procurement team.

Designing and implementing the right eProcurement solution creates in effect a virtuous circle, providing qualitative data on spending patterns which can then be used to further improve procurement practices, and then to implement new processes, guaranteeing continual business improvement.

Going public

The public sector has been a pioneer of eProcurement, and it is a business model which is already well-proven in Scandinavia, where the business benefits achievable have been real and tangible. One such example is the City of Helsinki’s approach. Let’s take a closer look at this.

City-wide procurement
With 5,000 employees and 50 professional buyers across 30 offices, the City of Helsinki took the decision to streamline its procurement processes and manage supplier relationships more efficiently.

The City has an annual purchasing volume of EUR 2 billion, and deals with more than 10,000 suppliers. It therefore looked to an automated eProcurement solution to effectively approve, manage and control procurement across the entire organisation.

After a rigorous selection process, the City of Helsinki selected Basware Purchase Management to streamline purchasing, obtain control over corporate spend and ensure best value for money. In addition, opting for a Software-as-a-Service (SaaS) solution eliminated the need for additional city resources to manage the technology.

Jorma Lamminmäki, Helsinki Procurement Director said: “Software-as-a-Service is an excellent operational model for our city. It frees up our resources and allows us to concentrate on our core competencies, such as optimising supplier relationships and overseeing competitive bidding. The city’s purchasing volume is about two billion euros per year. Saving even a few percentage points translates into significant sums of money.”

End-users can easily access and search online supplier catalogues, and then create a purchase request and place an order for the relevant goods or services. This approach has also enabled efficiency gains in internal processes, delivering significant financial savings to the city of Helsinki by supporting the automatic matching of purchase invoices with purchase orders and removing the need for further invoice approval.

All purchases are automatically captured in the system, ensuring the necessary visibility, control and comprehensive reporting to effectively manage and optimise procurement across the organisation – by automating these functions and processes, the City of Helsinki has been able to focus on core activities and on developing a more effective and strategic approach to procurement.

The eProcurement solution in place has enabled the city to achieve a matching success rate of more than 80% for invoices relating to existing orders, saving time and eliminating inefficiencies from the procurement process.

The city of Helsinki is now in a position to benefit from volume discount purchases and an ongoing spend analysis, in order to continue to realise ongoing cost savings. The city also plans to use its eProcurement system to expand its competitive bidding capabilities through online sourcing, to further optimise cost savings.

Transforming Procurement
The case of the City of Helsinki demonstrates that eProcurement technology has the ability to deliver real and tangible cost savings and a clear return on investment. Not only from ensuring lower prices and percentage reduction as a result of organisation-wide, streamlined procurement, but critically also from the internal efficiency gains that the technology brings with it.

Furthermore, the drive towards eProcurement is set to accelerate with the new Pan-European Public Procurement On-Line (PEPPOL) initiative. This is a consortium of experts, with the objective to make it easier for European economic operators, including SMEs, to respond to public sector procurement opportunities from awarding entities in any other country by using EU-wide implemented interoperable eProcurement solutions – giving real business opportunities for early movers.

The latest generation of eProcurement solutions are playing a crucial role in transforming the financial value chain, giving procurement managers greater control over corporate spending. Better visibility over business processes not only ensures cost-effective use of resources and budget, but also supports continued innovation and improvement of core processes, for a sustained return on investment – a formula which adds up for any organisation.

Esa Tihilä is Basware General Manager, Europe and Americas.
www.basware.co.uk / +44 (0)1483 459740