We are not quite at the Spend Matters level of traffic, but I think I will go out on a limb and declare E-Sourcing Forum the 2nd most popular blog in the space. Avis made billions of dollars taking ownership of the silver medal, so I will show no shame with the same designation.
Although I do not plan to constantly release traffic numbers, I do feel it important that this site has seen consistent and rapid growth since last August. March showed an “unique” visitor increase of 48% over February which had an increase of 26% over January.
I think this proves that the content we are providing is relevant and being well received both in the US and globally. So, to everyone that visits and reads our information, you are in good company that continues to build grass roots momentum.
In IBM’s recent white paper “Five SOA Projects that can pay for themselves six months” in their “Service Oriented Architecture Solutions to Support Your Business Objectives” series, October 2005, they point out that the value of SOAs is in the standard services and business processes SOAs provide, enabling a single view for each customer, supplier, and business partner and a single process for each specific need - allowing for smooth business operations.
Although the paper describes five projects that are expected to result in an immediate payback while providing a foundation for more flexible IT systems, and proclaims that “SOA offers an approach that can be incrementally adopted as organizations start the necessary but daunting task of bringing order to what might have become chaos” as they try to integrate coexisting IT systems that duplicate functions or data, there is one project in particular that stands out.
Project 3, “Document Verification Service: Delivering cost savings through service reuse”. Although not a sourcing project per se, it notes that services can be provided to a second set of users for a fraction of the cost of providing them to the first set of users. In other words, the project delivers payback simply through economies of scale, or the fact that the cost of a system decreases as the number of uses increases.
Why does this matter? Consider a large company that undertakes an e-auction or e-sourcing initiative for the first time. Even though the payoff might be huge (10% to 20% savings are common in first events), a company still might be reluctant to apply these technologies across their purchasing organization because such a project usually involves purchasing an expensive software platform, and expensive hardware to run it, ramping up tech support, extensive process re-engineering, and time-consuming training. In other words, a big undertaking with a big up front cost – all for a potentially huge payback that can not be realized until a significant cash outlay is made up front.
However, this is not the case if the solution is of the Service Oriented Architecture variety - or, in terms the rest of us can understand, already built, running, and waiting to be utilized - which is true of many well designed e-sourcing systems that run in ASP mode. In other words, not only is a second e-sourcing ASP event no more expensive then the first, but actually cheaper as each event builds the database and the process knowledgebase, allowing for faster setup of subsequent events. So, even if a provider did not reduce the event cost, a company would still save money on a subsequent event due to reduced time and effort! Moreover, most vendors will provide discounts for bulk event purchases or organizational licenses since they understand that their incremental cost for successive events decreases as well.
In other words, for a non-technical sourcing organization, ASP hosted e-sourcing solutions, be they e-auctions, e-RFP/e-RFQ, or e-decision analysis, are the service oriented architectures a purchasing department can bring to bear to immediately increase their productivity, decreasing their costs, and tame their IT nightmare, regardless of the degree of savings such events produce.
“According to a newly published IDC study, the acceptance of Software as a Service (SaaS) delivery models … continued gathering momentum and customer mindshare in 2005 which is expected to further increase in 2006.”
IDC’s top ten predictions for SaaS in 2006 are:
* Large ISVs Will Spin Off On-Demand Versions of Products
* Small and Medium Enterprises (SMEs) Remain a “Tough Nut to Crack”
* Microsoft Strengthens SaaS Resolve
* Software on Demand Providers Focus on Partnering
* Mini-Ecosystems Emerge to Extend the Reach of Software on Demand
* SaaS Enablers Continue to Aid Availability of On-Demand Offerings
* Merger and Acquisition Activity Continues
* SaaS Providers Concentrate on Improving Offerings and Customer Experience
* Hosted AM Becomes a Stepping Stone Towards On-Demand Delivery
* SaaS Will Help Drive a Software Industry Transition to Subscription Licensing
You can read some alternative articles about the study here and here.
Also, Aberdeen and Purchasing recently weighed in on the industry which gives interesting perspectives.
Of course, Iasta is already way ahead here, having been a SaaS delivered model since 2000 with our inception (and called ourselves an ASP). We have seen this model work for many years and it is nice to see the momentum that is gathering across all industries which validates it.
The delivery model of most e-Sourcing vendors is getting more daily publicity as a strong business model. Articles like this, and this, are appearing in publications weekly which are making the terms more commonplace.
This type of software model makes a lot of sense for purchasing departments as it is easy to get launched, cost effective, has rapid ROI value, involves minimal (if any) IT involvement, is highly flexible, and takes no resources away from the people using the technology. “Deployment” is turnkey and can literally have users into the solution doing real sourcing projects within an hour.
I have always found it interesting though, that so many terms are used to describe the same thing. Remember ASP (application service provider)? That is old news now, thanks mostly to pets.com and Navisite, etc. Successful companies have re-invented the terminology to distance themselves from those failures with fancy terms like SaaS and software on-demand. It is really all the same thing and not worth splitting hairs over and makes for sound business strategy. We have customers all over Europe that literally can be utilizing the benefit of our technology without a single hitch which is truly amazing and plays a large role in our growing success as a company.
IDC recently released a study on SaaS and I will be writing another post on this topic tomorrow.
A book called A Whole New Mind written by Daniel Pink and published last autumn argues that in order to be successful in the 21st century we need to develop “soft” skills which are prevalent with the right hand side of the brain. It outlines that traditional knowledge based professions which use the left hand side of the brain, like Banking, Law, management and engineering are likely to go the way of Blue Collar jobs. The internet is the common factor as we all have access to the same level of information and thus this knowledge now becomes a commodity.
How does this relate to esourcing I hear you ask? Well esourcing is a rapidly developing area and much of what is discussed in the book is happening in this space now. Take bid optimisation as an example, a new development that automates the analytical decision award process! Another example is Contract Management as it becomes more sophisticated there will be a less requirement for lawyers - Yippee I hear you say! (Maybe they can start to automate the conveyance process and reduce the cost of moving house - now there’s an idea)
I would like to avoid the over used term of Strategic Purchasing but those of us that are more creative will do well utilising the esourcing tools, spending our time on creative solutions rather than on the process.
This led me to think about how our future Procurement Professionals will be prepared for the task that lies ahead? Who else to refer to but the Chartered Institute of Purchasing (CIPS) so I approached the website expecting the worst and well…..I got it. I read through their courses and it concentrated on process, contracts, supply chain etc. I searched for auctions and got good links to local events where auctions had been discussed - saving 20% etc etc. But nothing on eRFX, Contract Management Systems, Bid Optimisation or even auctions.
I even picked up a leaflet on the “Introduction to eAuctions” where in point 3.2.2.1 it says that the customer is focused on price alone. In point 7.1 it gives examples of suitable eAuctions which to be frank were more relevant 6 years ago.
In the spirit of creative thinking let me propose an eSourcing module for CIPS or even a whole course for our Future purchasing professionals:
i. eRFX – Think creatively and propose how you would use your eRFX suite to tackle all your spend areas.
ii. Reverse Auctions & Closed Bids - Propose how you would create a strategy for each area of spend. When would you propose to use a reverse auction? What further tactics would you employ i.e. rank only etc. When would you use a closed bid?
iii. Bid Optimisation - how does it work? Propose an area where it would be suitable. How might this change the approach of purchasing department?
iv. Contract Management – How does it work? How can I utilize the benefits?
v. 21st Century Procurement Organisational Structures – Discuss……
The 21st Century certainly offers us challenges but with these challenges comes opportunities. Esourcing is becoming main stream, freeing our working day from laborious processes. Those who embrace this change will quite rightly as Daniel Pink suggests do very well in the 21st Century.
Thank you to everyone that made daily visits to ESF this week. We are very happy with the quality of the report that was collected and generated. Iasta is currently developing a white papers which will cover the strategic sourcing lifecycle and best practices that we have identified over the last 6 years. Strangely, there is a noticeable lack of quality white papers for this industry and we will be releasing several during 2006 (via RSS and traditional modes) to help alleviate this problem.
e-Sourcing does not equal reverse auction
After looking at all the survey responses, it became clear that many companies – Large, Medium and Small – wrongly assume that e-Sourcing means reverse auctions. By making this assumption, these companies often decide not to use ANY e-Sourcing tool. Strategic e-Sourcing is not about reverse auctions; it is about using the right tool, at the right time to get the right results. It is widely agreed that not every item/category should be bid through a reverse auction. However, there are other ways to leverage the power of e-Sourcing without using a reverse auction. Sourcing professionals can distribute bid information through online RFQs or RFPs. They can collect pricing information through online sealed bids or RFIs. They can make complex award decisions through online decision analysis tools. And they can track supplier issues – contract or performance – through online tools. These tools can either be installed or hosted. These tools can be provided by one vendor or multiple complimentary vendors. Regardless, Large, Medium and Small companies need to look beyond reverse auctions and embrace e-Sourcing technology. By using e-Sourcing technology, companies can:
reduce sourcing cycle times
improve collection and distribution of bid information both internally and externally
implement and capture greater savings
ensure compliance and consistency across the sourcing team
and maximize utilization of resources
create accelerated knowledge transfer throughout the organization
The data Iasta collected seems to indicate that if companies decide not to utilize reverse auctions on a regular basis, they also seem to reduce usage of other types of functionality. This is both a disappointing revelation (the baby is sometimes being thrown out with the baby water) and a promising revelation (there are still massive opportunities for companies and vendors to grow with e-Sourcing technology). It seems that all companies need to adjust their own perception of what the benefits are of e-Sourcing and the vendor community needs to evangelize the soft factors and the alternative cost benefits to reverse auction technology.
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Companies need for decision optimization
As I mentioned in earlier blog entries, strategic e-Sourcing is not just reverse auctions. Let’s talk a little more about another good use of an e-Sourcing tool – tools that support decision analysis. Decision Optimization tools can be used for both complex and not-so-complex decision analysis.
All companies, regardless of size, face complex award decisions at one time or another. Very few organizations (17%) use decision analysis tools to help make complex award decisions. In addition to relying on spreadsheets and email, companies need to coordinate decisions across multiple people in multiple regions and locations. Since these companies do not use e-Sourcing technology for decision analysis, they are further burdened with spreadsheet version control, project management issues and complicated email traffic trails. Though few organizations use decision analysis tools for sourcing analysis, 81% of the respondents indicated that they make complex award decisions which would warrant the tool’s use.
This is truly an amazing statistic. Basically, the overwhelming majority stated that they had spend that required complex analysis and award decisions. Conversely, the overwhelming majority stated that they are making those same decisions without the assistance of any type of technical tool. Depending on the type of category and factors involved, it is reasonable to assume that Decision Optimization tools can identify an additional 5-10% savings over traditional methods but are being left on the table.
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Adoption vs. Availability
Though reverse auctions have been around for many years, many companies still do not utilize it – especially Small and Medium sized companies. And though Large companies run more auctions than Small and Medium ones, there still exist opportunities for them to run more reverse auctions. One reason for this reluctance is that companies seem to be attached to incumbent suppliers – for both good and not so good reasons. Because of this attachment, many companies miss savings and quality opportunities through their reluctance to source portions of spend or try new suppliers. Incumbent suppliers successfully play to this fear and resistance.
Use of reverse auctions. Though 63% of companies responded that PRICE was the primary reason to switch suppliers, only 5-25% of companies actually switch suppliers.
Strategic spend. A large number of respondents (70%) indicated that only 25% of spend was too strategic to source. Yet despite the availability of spend, only 5% of spend is sourced via reverse auctions. Though incumbent suppliers may lower prices during negotiations, far more savings may be left on the table from potential suppliers.
Is it possible that companies “feel bad” about using a reverse auction in a category where a supplier has traditionally performed? It seems so, due to the huge gap between what buyers feel are categories that are “off-the-table” and categories that have sufficient opportunity for competition. Although we would not suggest that the entire amount be sourced through e-auction, it seems illogical that so much spend be left untouched by auction technology since it is a very efficient way to achieve market price transparency.
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Reverse Auction Usage
Today’s entry talks about something that gets the most attention relative to all e-Sourcing tools – reverse auctions. A large number of responding organizations (70%) have run reverse auctions. Not surprisingly, Large organizations have tried reverse auctions more often than smaller companies, probably because they have more spend at their disposal and are much more willing to utilize technology to maximize efficiency.
Obviously, the use of auctions decreases with the relative size of the company. There has been enough buzz over the past five years that most companies have at least tried running a reverse auction. This statistic also indicates that reverse auctions are considered “mainstream” by the majority of companies. (My next blog entry will talk more about adoption rates for this tool, but for now let’s just talk more about reverse auctions.)
But, as many of you know, it’s not enough just to try a reverse auction in order to check the box and say it was done. A reverse auction is just the tip of the iceberg and requires a sourcing organization to start thinking differently about how it sources and how it relates to other business units. Running a reverse auction is the easy part – run an auction, identify savings, and implement savings…easy. You get the low-hanging fruit and go back to the way you’ve always done it. (“It’s a great idea for ‘X’, but it won’t work for ‘Y.’”)
The hard part is developing and continuing an e-Sourcing strategy that involves not only reverse auctions, but other sourcing tools like decision analysis, spend analysis, and supplier management. The hard part is developing an e-Sourcing strategy that involves collaboration with other business units rather than order taking, material expediting and logistical problem solving. And this is where many companies stumble.
After working with many companies over several years, it’s clear what makes companies successful when it comes to strategic e-Sourcing – regardless of industry. You’ve heard it before, but I always like to repeat these factors.
Key success factors for e-Sourcing:
1. Visible, vocal leadership with a plan
2. Long-term commitment to strategic e-Sourcing
3. Use of commercially available e-Sourcing tools/application
4. Use of standardized operating procedures that evolve with business needs
5. Commitment to team through training and new skill acquisition
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Standard Operating Procedures
I mentioned in my last entry that we’ll be talking about the information Iasta discovered by conducting a Benchmark Survey in 2005. The first area I wanted to highlight was that of Standard Operating Procedures for sourcing. I emphatically believe that successful organizations need to use OPs. The tricky part is having the right number of OPs to aid consistency and performance across team members. With too few OPs there is maverick behavior, with too many OPs - individuals become too controlled and restricted.
Standard Operating Procedures (OPs): When examined across all respondents, it appears that slightly more companies (52%) have OPs than do not (48%). However, when reviewed more closely, this area demonstrates a great disparity between Large and Small companies. It appears that the larger a company is the more standardized operating procedures it is likely to employ.
It is logical to assume that smaller companies tend to rely more on informal teams and processes. Spend is usually centrally managed and communication can be easier in smaller companies. However, based on rapidly increasing inbound interest from SMBs (regarding the Iasta software) and analysts’ opinions, like Aberdeen, it seems that these mid-market companies are beginning to trend towards sourcing automation.
These procedures build the foundation for successful sourcing operations. Without having adequate and controlled operating procedures, it is difficult for any company to maximize its potential and be truly efficient. Smaller companies would greatly benefit from the implementation of such processes and incorporating strong sourcing automation functionality.
Tomorrow we will look at reverse auction usage patterns across business size.
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Check out E-Sourcing Forum all week, starting on Monday. We will be officially releasing the findings of our e-Sourcing Benchmark Diagnostic report. I am going to highlight a specific item each day that will be based on the data we collected in Q4 2005. The survey (which used Iasta SmartSource technology, of course) was created internally and covered a wide range of spend management/e-Sourcing issues. I think there is some very interesting insights that we discovered as a result of the data. The final report was created by our team led by Melissa Beuc and Jason Treida and each respondent received a custom benchmark report that focused on their own specific answers. This final report is a holistic view of the data covering over 40 detailed questions about strategic sourcing tactics, technology usage patterns, future plans and perceived vs. real benefits.
Below are some of the demographic details that were captured during the study.
Found another interesting article in European Leaders in Procurement this week which jumps on the topic of procurement/sourcing technology ROI maximization. Tim Richardson, Manager of Procurement Operations, British Airways, was quoted:
“Technology is an enabler, no more, no less. But if the business process isn’t right, or if the people don’t want to or do not know how to use the technology, it will fail.”
There is no question about this fact, we see consistent reactions from buyers that feel threatened by the technology. This is not because they are averse to software, but it is because they think the tool is brought in to make them look like poor performers. This could not be further from the truth, with virtually all procurement departments finding more to do with fewer resources, these tools are meant to make teams more productive.
The article also brings up good points about having an internal champion who takes on a leadership role with any type of spend management software. We find within our client base that the highest performers are companies that have dedicated people to the process and enforcement. Once a little momentum is generated, it spreads very easily and people embrace our tool quickly.
Overall, this is a very good article and worth a read.
I recently returned from a whirlwind visit to China where I met with suppliers in various industries. The trip emphasized to me the great variation in supplier capability and sophistication in developing markets, and the importance of a prequalification processes to winnow down potential vendors before conducting onsite visits and assessments. The good news is that eSourcing applications can play an incredibly useful role in helping companies of all sizes to qualify low cost country suppliers. Even without deploying a competitive negotiation process, by using an RFI capability and / or by creating a custom assessment template, it is possible to save significant time and effort by examining and comparing the capabilities of suppliers on an apples-to-apples basis. When looking at software to help automate this process, it’s critical to ensure that these capabilities are integrated into a broader sourcing suite that enables global users to share information and supplier intelligence with each other during the sourcing process. And as important, look for an interface which is self explanatory and easy to use on the supplier side. In the global sourcing process, where face-to-face meetings can lead to the best price and terms, an eSourcing suite can be a lifesaver even if you rarely use reverse auctions or other competitive negotiation features.
I got my latest copy of European Leaders in Procurement last week and I must commend Mark Perera, as the publication is relatively new but very well done and extremely high quality.
This issue featured an editorial about e-Sourcing software from Dennis de Jong, SVP of Global Procurement, ABN Amro Bank in Amsterdam.
Mr. de Jong makes excellent points about how companies lose focus of the benefits of e-Sourcing tools beyond the occasional e-auction. The amazing thing is that the occasional e-auction still drives ROI high enough for many companies to justify the license expense of a software package but there is so much more behind the curtain that is untapped.
He mentions points that I repeat constantly such as: knowledge transfer, collaboration, speed/efficiency, and assistance with Sarbox compliance. He also brings up some interesting concepts of how these tools are meant to support and make purchasing teams more effective, not impinge on their value to the company.
Interestingly, this topic is very relevant to the Iasta e-Sourcing Benchmark survey that was conducted recently. Our report findings will be released very soon and match very consistently with Mr. de Jong’s ideas. Check back as I will soon be covering some of our conclusions on E-Sourcing Forum.
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