As the public sector prepares for mandatory eProcurement in 2016, Pedro Paulo, discusses the technology and drivers, plus how this technology will strengthen public sector purchasing.
The stark economic climate caused by the global financial crisis has caused organisations to examine any areas which can offer potential cost savings and boost efficiency.
Procurement is not exempt from this search for savings and the public sector in particular has a very real opportunity to reduce costs because of the enormous scale of public sector purchasing in the UK.
Procurement by public bodies accounts for one sixth of the UK’s entire GDP (gross domestic product), a huge sum and one which therefore presents a major opportunity to deliver real savings.
This is the thinking behind the European Commission’s decision to mandate that all public purchasing in the EU must take place through electronic procurement (eProcurement) platforms by 2016. Since the dawn of the internet, specialist procurement solutions have automated the processes involved in the purchase of goods and services. Over the years eProcurement platforms have developed to encompass all of the different areas of procurement to help create a strategic picture of an organisation’s total spend profile. In part it is this transparency and increased visibility of data that the European Commission is relying on to reduce cost.
The Commission is not the only body with a desire to reduce the cost of procurement. In fact the emphasis placed on reducing cost and increasing efficiency in 2011 saw spending on eProcurement solutions rise above industry expectations, contributing to revenue growth in the procurement market of 11.5 per cent over twelve months. Growth forecasts indicate that total market value will surpass $4.9 billion in 2016, according to a predicted average annual growth rate of 6.7 per cent.
The history of eProcurement
Reading these figures about the recent growth of eProcurement can help to create the false impression that eProcurement is an entirely recent concept. In fact during the 1990s many businesses automated their supplier relationships and processes through the implementation of solutions known as Electronic Data Interchange (EDI) systems. As the internet became more widely used within both public and private sectors, there followed an enthusiastic adoption of online tools promising the automation of purchasing processes, which led to the appearance of a number of online B2B ecommerce sites. But constraints on bandwidth available at the time and worries around the security of ecommerce cooled initial enthusiasm for these early solutions.
Now though the situation is vastly different and this is enabling increased uptake. Ever increasing bandwidth, the growth in network-critical organisations and the security and maturity of web-based technologies such as cloud computing have all caused organisations to look again at whether eProcurement solutions can deliver tangible benefits. With many public sector organisations having automated multiple front and back-office processes, some are now beginning to weigh up how information and communications technologies can help to optimise their value added supply chains.
Drivers for change
Alongside these facilitators factors there are hard economic drivers too. Now more than ever organisations recognise the need to become leaner and more competitive. Cost reduction is certainly one reason organisations turn to eProcurement, but many users are also looking to improve operational efficiency and streamline processes.
Big data has become something of a buzzword in recent times and the procurement function is not immune from its reach. Purchasers have realised that there are gains to be made by obtaining a more accurate vision of expenditure and outlay performance. By providing a complete picture of purchasing, large organisations in particular can evaluate expenditure and look for savings by analysing the data collected through eProcurement platforms. This analysis can help organisations to target spending on the areas where it provides the best returns, a key way of making static or falling budgets go further.
The need to promote efficiency in procurement has been recognised at the highest levels of government in the form of a mandate from the EU. Central governments will lead the charge with most expected to implement eProcurement solutions by 2015, one full year ahead of the deadline. Some public sector organisations are already using eProcurement platforms, and today 5 per cent of public purchases in Europe are made using these solutions. Although a relatively low figure, clearly this still represents a significant amount of revenue in the context of combined EU public procurement spend.
According to research from IDC the global demand for eProcurement solutions is set to rise in the coming years, with average annual growth by 2016 in the Asian market at 9.1 per cent and 7.7 per cent in North America. Despite the coming deadline for mandatory EU public sector eProcurement, growth throughout Europe is estimated to be more modest at 4.6 per cent. One reason for this may be the already advanced nature of the eProcurement market in some European countries. In Portugal for example, the use of eProcurement has been mandatory since 2009 for all public purchases over €5,000 which helps to explain why the Portuguese market is more developed than other EU countries and perhaps why European growth estimates are more cautious than those in Asia and North America.
The Portuguese example
Ahead of mandatory eProcurement it is instructive to look at Portugal where the publication of the Public Contracts Code in 2008 revolutionised the public sector contracting process by enforcing the use of eProcurement in public sector purchasing, including the adoption of new solutions and the official certification of platforms.
The code regulated two major elements of public sector contracting. Firstly it established a series of procedures to govern public sector tenders, and secondly it set out the responsibilities of both parties involved in any transaction and their accountability in respect of the process.
This regulatory reform of the public sector procurement process means that Portugal now has one of the highest rates of penetration of eProcurement services in the European Union. A knock-on effect of this has been to increase private sector uptake as enterprises have looked to sell to government and public bodies.
Although still relatively small compared to public sector usage, the number of companies in Portugal placing or receiving orders online has been increasing significantly in recent years. According to data from the Portuguese National Institute of Statistics, in 2010 35 per cent of SMEs (small to medium-sized enterprises) used this new eProcurement infrastructure to access information. The figure for larger companies was somewhat higher (60 per cent), reflecting the increased efficiencies which large companies can gain by exploiting economies of scale in the procurement process.
A long-term solution
The Portuguese example serves as a useful road map as the rest of the EU prepares to make the transition to eProcurement, although ultimately each nation will face its own unique challenges. For instance both buyers and suppliers will need to update their systems in order to improve purchasing and cost management processes, and enforced capital expenditure at a time of stretched budgets is unlikely to be universally popular. But figures from IDC forecast cost reductions in excess of 30 per cent when the regulations come into force, which is clearly a hugely significant sum as part of overall EU public sector spending. The early adoption by many public sector bodies indicates a willingness to comply and an expectation that eProcurement will have a major beneficial impact on the future of public purchasing.
Pedro Paulo is CEO, Gatewit.