Electronic Commerce Solutions - Part II
Russ Boyd, Supply Contracts Manager, Perot Systems Corporation, Plano, Texas 75075, 972-461-3305, 972-461-3523 (fax), email@example.com
85th Annual International Conference Proceedings - 2000
Capturing All the Costs and All the Savings
Abstract. What are the true costs involved with selection and implementation of an e-commerce procurement solution? What are the savings? What is the Return on Investment for your solution? Have you captured everything? Is your definition of savings the same as someone elses, ie: your finance organization? Whose is correct? These are all definite key questions that need to be answered when determining if your chosen e-commerce solution is financially justifiable and feasible. It is critical to the approval of any e-commerce solution that all of the costs and all of the savings have been captured. This session will look at what those costs typically are, what some of the hidden costs might be, what the savings typically are, and how to overcome the "soft savings" that finance organizations typically discount.
Capturing the Costs. It is critical in the purchase evaluation of any software package to make sure that you understand and capture all of the costs associated with such a purchase. Often times cost will be erroneously equated to be the price of the software while many of the other true costs are ignored or forgotten. Therefore, it is important to identify all of the relevant cost drivers. For an e-commerce procurement solution, the cost drivers are many.
- Software Cost - The most obvious and sometimes the biggest cost involved with an e-commerce procurement solution is the cost of the software itself from the chosen supplier. This cost will vary greatly depending upon 1) the size of your organization, and 2) the solution chosen. It will be very important to do as much research as possible to benchmark the right solution cost for your company size and application goals.
- Implementation Cost - Another cost that can rival the cost of the software is the implementation cost. When looking at these costs, it is important to capture both external (supplier provided) and internal. Most all e-commerce procurement solution providers have implementation teams that can either assist with implementation, or do a turnkey implementation. However, even a turnkey implementation by the supplier will still require internal resources to interface with and assist the supplier. Some of the key internal resources required may include a project manager, systems analysts, business analysts, programmers, procurement personnel, etc.
- Hardware Cost - Most likely, purchase of additional computer hardware will be required to run the e-commerce procurement solution. Depending upon the chosen solution, and the desired system functionality, this could be anything from a high end PC running Windows NT up to a high end Unix server. In either case, a significant amount of additional hard disk storage will be required. Most of the e-commerce procurement solution providers have recommended hardware to effectively run the solution. Therefore, it is important to analyze this cost early in the decision process so there are no surprises in the end.
- Additional Software Cost - Along with the purchase of additional hardware to run the solution, there is generally additional third party software that will need to be purchased along with the hardware. This will be dependent upon the hardware platform chosen, as well as the features included in the chosen solution. For example, for a Windows NT based solution, there may be costs for Microsoft Site Server licenses, Microsoft SQL server licenses, and Client Access Licenses (CAL's). Also, there may be costs for reporting software, etc. It is critical to identify all of the required additional software early in the decision process. Most of the e-commerce solution providers can identify what additional software is required to run their solution on a given hardware and operating system platform.
- Software/Hardware Maintenance Costs - With the purchase of any hardware or software, there will be on going maintenance and support costs. These costs will vary, but are typically anywhere from 12-20% of the purchase price of the hardware / software. Make sure that the software maintenance costs include all updates and enhancements, as well as error corrections. Also make sure that priority definitions, response times, and resolution time service levels are included along with an escalation procedure, and remedies for failure to meet agreed upon service levels.
- On-going Support Costs - In addition to hardware and software maintenance costs, there will be additional internal and/or external support costs. These costs typically are for any required consulting, catalog maintenance, internal system maintenance (back-ups, help desk, etc.), any on-going training and updates, and any transaction fees associated with the chosen solution. It is important to make sure that all of these costs are identified in the purchase decision process, especially catalog maintenance and transaction fees, as some e-commerce procurement solutions may require more on-going support than others.
- Miscellaneous Costs - There will always be those miscellaneous costs that rise up, and these are always the most overlooked costs, and the ones that will come back to haunt you in the end. These costs include training, customization, facilities and utility allocations related to the required hardware and software, telecommunication costs, etc.
Capturing the Savings. E-commerce procurement solutions offer a huge and varied savings potential to almost any size company. These savings, if captured and presented correctly, will far outweigh the cost of such a solution, and lead to a minimal return on investment, and a large contribution to a company's bottom line profits. In order to determine what much of the savings will be, it is fundamental to determine what is the cost of doing business under the current system. Some of this may be very apparent, ie: cost to process a purchase order, but some may require some in depth research such as the average cost to complete a requisition, or the cost to approve a requisition. To determine many of these current costs as well as the savings potential, it may require conducting cross functional interviews of various users, and/or performing task analyses of various current processes. From this analysis, it then becomes much easier to identify potential savings around identified processes that an e-commerce procurement solution will provide.
- Productivity Improvement Savings - Through the task analyses and interviews discussed above, it will be easy to capture savings due to productivity improvements related to the below. Savings related to productivity improvements are sometimes difficult to sell to management and finance since there is no "reduction of headcount, etc.", but if expressed as a future cost avoidance, ie: the ability to increase workload without addition of headcount, a best in class company will recognize these improvements as actual cost savings.
- Creating Requisitions - The amount of time spent creating requisitions under the current system, and the savings resulting from an e-commerce procurement solution from catalog shopping, ease of requisition creation, etc. Measure on a cost/savings per requisition/transaction basis.
- Tracking Submitted Requisitions - The amount spent in routing and tracking requisitions under the current system, and the savings resulting from an automated routing and workflow approval engine in an e-commerce procurement solution.
- Requisition Approval - The amount of time spent by management and finance in reviewing and approving requisitions, and the resulting savings in an e-commerce procurement solution from having detailed requisition information available almost instantaneously, requisition uniformity, ability to attach detailed justification documents, and ease of routing and accessing requisitions for approval.
- Procurement Resource Reallocation Savings - As an e-commerce procurement solution automates the procurement process and eliminates the non-value added redundant work of searching for goods and services, obtaining price quotations, entering purchase orders, etc. that is now all handled by the end user when creating a requisition, procurement resources will need to be reallocated and retrained. Buyers may be retrained as Supplier Managers, Sourcing Specialists, and Contract Managers that are focusing on the strategic management of the supplier and not the tactical day to day order placement. This inevitably will lead to a reduction of headcount in the procurement department, and reallocation of those resources to other areas of the company. The savings from this headcount reduction and resource allocation should include not only annual salary but also benefits and overhead allocations as well.
- Material Cost Reduction Savings - E-commerce procurement solutions help to eliminate maverick purchasing which also helps to consolidate procured goods and services to preferred suppliers. This works to take advantage of the contracted discounts available from those suppliers, as well as increase volume with those suppliers to leverage additional discounts. Typical savings resulting from this consolidation is 1% - 3% of the total annual spend of goods and services. Some companies have even seen this number in the 5% - 10% range. Savings in this area will depend on many factors such as the amount of existing maverick purchasing, the additional volume available to leverage additional supplier discounts, and the availability of reallocated procurement resources to negotiate new and revised supplier contracts.
- Increased P-Card Use Savings - One of the key features of a good e-commerce procurement solution is the ability to process transactions directly and electronically with a supplier and utilize a P-Card for payment. An e-commerce procurement solution can be tailored with appropriate business rules such that certain transactions are automatically purchased using the P-Card for payment. This works to promote savings in two ways. First, if your P-Card has rebates associated with specified volume levels, the increased P-Card volume resulting from the e-commerce procurement solution will result in increased P-Card rebates. Depending upon the P-Card supplier and the volume incentives, typical increased rebates are about 2% of total P-Card spend. Second, by increasing the use of the P-Card for payment of e-commerce procurement related transactions, this will decrease the number of invoices required to be processed by Accounts Payable resulting in productivity improvements and resource reduction/reallocation of Accounts Payable personnel.
- Electronic Expense Report Savings - Many e-commerce procurement solutions have an electronic expense reporting solution either embedded as part of the procurement solution, or available to purchase as an additional option. If this option is indeed included, additional savings can be achieved. Productivity improvements can be achieved by the user in that the time required to create an expense report is reduced due to automatic population of the expense report, automated routing and approval utilizing the same workflow routing and approval engine as the procurement solution, and reduced follow up on approvals and payment of expense reports. Additional savings can be achieved within the Accounts Payable organization through reduction of paper expense reports and electronic processing. In order to validate all of these savings, the same task analyses and user interviews must be conducted to determine the current process and costs, and then determine available savings.
- Cycle Time Reduction Savings - Probably the most difficult savings to determine and validate is savings associated with reduction in cycle times from implementation of an e-commerce procurement solution. First, the actual cycle time given the current system must be calculated. This is the time from requisition creation to order placement with the supplier, and could go as far as delivery from the supplier (the supplier may achieve efficiencies within its system by receiving electronic orders directly from the e-commerce procurement solution). Depending upon the type of business a company is in, the reduction in this cycle time by implementation of an e-commerce procurement solution may be able to be calculated as cost savings. If your business is time dependent upon the delivery of goods and services, then this is probably the case. Your senior management and finance organization can help you with this determination.
Summary. In summary, it is critical that you involve all organizations within the company that will either interface with or be impacted by implementation of an e-commerce procurement solution. These organizations will have to accept and validate the costs and the savings, and more buy in will be achieved by involving these parties upfront. Each of these groups will help identify costs that may not have been considered, as well as bring savings opportunities to the table. Without buy in from these cross-functional organizations, approval of your e-commerce procurement solution will be very difficult. Including them in the process will initiate their support and lead to an easier approval. Remember that the ideas and power of many are much greater than the ideas and power of the few. E-commerce procurement solutions will generate significant cost savings and an acceptable return on investment given that all of the costs and all of the savings are captured.