Buying into the right strategy

Mohawk Industries made a somewhat surprising discovery while investigating the possibility of outsourcing its accounts payable function: Applying the right information technology (IT) to the process would yield greater and more sustainable savings.

"If technology could eliminate paper from the operation, then we could eliminate the need for people to process that paper," explains Mark Dailey, director of financial operations and support processes for the Calhoun, Ga.-based maker of flooring products. "Moving the job of handling the paper to another country wasn't going to be as efficient as eliminating the job altogether."

Mohawk's experience reflects a lesson many manufacturers are learning as they look to make procurement processes more efficient: No single strategy is right for all companies. Outsourcing in particular is a strategy that warrants careful scrutiny because it can generate substantial value under the right circumstances.

According to research released last fall by Atlanta-based Hackett Group, companies that make up the Fortune 500 could collectively save $58 billion annually—equivalent to $116 million per company—by outsourcing many of their back-office activities. Approximately 17 percent of those annual savings—including a reduction of roughly 275 jobs per company—could come from outsourcing procurement activities, reckons Hackett, with purchase order (PO) processing and sourcing execution offering the highest potential ROI.

Yet to maximize the return offered by outsourcing procurement work, businesses need to ensure their procurement models are compatible with the outsourcing model.

Outsourcing works best when the outsourced activities are highly specialized, observes Chris Sawchuck, global practice leader for procurement at Hackett. "Organizations in which buyers do everything from sourcing analytics to cutting the purchase order will find outsourcing less attractive than companies where these activities are undertaken in isolation," Sawchuck observes. "The more granular the task, the greater its potential for successful outsourcing."

Knowing what is expected from an outsourcing arrangement also is vital. When negotiating an outsourcing or offshoring deal, "Be very clear about what the success criteria are, and make sure these are reflected in the contract," stresses Paula Barrett, Leeds, U.K.-based partner in the international technology practice at Eversheds, the world's third-largest law firm. "Is the objective greater cost savings, efficiency improvements, or a faster elapsed time? Aim for specific outcomes that can be demonstrated, and put in place appropriate measures. Focus is important."

This approach caused Mohawk Industries to abandon thoughts of outsourcing or offshoring, and instead join an "e-Invoicing Network" operated by a vendor called OB10. The network can link customers and suppliers anywhere in the world. OB10 does all the work of connecting them to the network, and managing the translation and exchange of documents between partners.

Joining the network helped Mohawk Industries achieve the primary goal it set when it began looking for new ways of processing supplier payments: reduce labor costs. Because Mohawk still receives around 20,000 invoices a week from its 8,000-plus suppliers, even with a document imaging and workflow system in place, a staff of 50 was needed to process all that paperwork.

Today, Mohawk gets invoices from 760 of its largest suppliers—equating to some 400,000 invoices a year—in electronic form via the OB10 network. The invoices are transferred automatically to Mohawk's J.D. Edwards accounting system. A three-way match between invoice, PO, and receipt data is performed at the line-item level, triggering payment approval where a match is found, and routing exceptions to the human-controlled invoice approval workflow system. Since adopting this model, Mohawk eliminated 10 invoice-processing positions, yielding a cost reduction of some $400,000 a year. "With outsourcing," says Dailey, "we just couldn't see ourselves getting that level of savings."

Novartis, a Basel, Switzerland-based medical products company, also is taking a hard look at the presumed merits of outsourcing. Giles Breault, chief procurement officer at Novartis' pharmaceutical division, says while the potential cost savings from outsourcing are intriguing, "The real question is whether the outsourcing agency can do the procurement job better than we can. There are all sorts of companies offering to undertake the transaction side of purchasing—but I don't see very many organizations out there capable of performing the strategic sourcing part of the picture, and doing it better than we can," he says.

This idea is leading some manufacturers to hybrid procurement models, with responsibility for procuring only certain types of goods being outsourced. In this model, outsourcing the responsibility for some procurement categories allows them to concentrate on doing a better job on those categories that they elect to retain at home. It's a move that gives rise to two distinct sources of gain: transactional and similar efficiencies on items that are sourced and procured through the outsourcing route, and the opportunity to realize more strategic gains on those categories and items that are retained.

"We're seeing a lot of work from companies that want to focus scarce procurement resources on a few strategic categories—with the rest being outsourced to us," acknowledges Hap Brakeley, global head of Accenture Procurement Services, which handles procurement transactions totaling $38 billion a year on behalf of a global client base that includes London-based Unilever.

Even software vendors are adopting these new procurement models; Oracle is a case-in-point. Some 30 percent its purchase transactions are handled by a shared service center in Bangalore, India, explains Greg Tennyson, Oracle's VP of global strategic procurement and travel. The balance goes through Oracle's own e-procurement solution—the same one it markets to customers—configured to operate in a manner that Tennyson and other procurement professionals describe as touchless procurement. POs are generated and routed to suppliers without being touched by the procurement function.

From an Oracle employee's perspective, says Tennyson, "It's like the online consumer shopping experience—but instead of submitting credit card details, they generate a purchase order." The same XML link that takes the order to the supplier also delivers suppliers' invoices back to the customer, completing the cycle. "The invoice is automatically matched to the purchase order, triggering the approval to set up the payment," adds Tennyson. "It truly is a touchless operation."

Tennyson estimates this system reduced Oracle's overall cost per transaction to the $15-$20 range; comparable, he says, with the cost of conducting a transaction with a procurement or credit card. Automating the transaction, he adds, also makes it easier to capture information about the company's spending patterns, offering a greater opportunity to analyze that data and perhaps adopt new policies that will generate even greater savings.

"When you can reduce your procurement transaction cost to the point where it competes with a card transaction, then you can generate a lot of data on who's buying what, from which suppliers, and at what cost—plus, of course, you're minimizing your 'leakage' by maximizing your on-contract buys," says Tennyson.

Tennyson's reference to replicating the consumer shopping experience is becoming a common goal for procurement technology vendors as they aim to make their products easier to use—a necessary requirement if touchless procurement is to become a reality for businesses that lack the IT resources of a company as large as Oracle.

"Typically, purchasing technology implementations go great—until you roll them out, at which point user adoptions fails," observes Pravin Kumar, VP of products at on-demand procurement technology vendor Ketera. Released last fall, the latest version of Ketera's offering intends to boost adoption by deliberately borrowing heavily from what Kumar describes as the best model for a consumer-friendly procurement application: Amazon.com.

"Easy search, powerful filtering, ease of selection, and a shopping cart—Amazon has it all," says an admiring Kumar.

Ketera designed its new consumer-friendly offering based on a request from a global customer. The new interface wasn't on the original technology road map for the product, "because no one was asking for it," explains Kumar. But when the request did come in, Ketera bounced the idea off other customers, and found widespread appeal.

"It sometimes takes customers to drive these things—and visionary customers too," observes Kumar. "Most of these larger users have tried lots of things, and been burned badly along the way. The visionary part of it comes from seeing things fail, and figuring out why. The bottom line is you don't get business results unless you get adoption, and you don't get adoption without ease of use."

And with that adoption comes enhanced compliance with corporate procurement policies and negotiated contracts, believes Dian Trosclair, VP of strategic sourcing and supply chain management at Memphis, Tenn.-based cleaning services franchiser ServiceMaster, which is testing the new Ketera product.

"The single biggest challenge we face today is getting employees to comply with our purchasing processes," Trosclair says. "If we don't get full adoption of the system, we leave huge savings on the table because we can't extract the full value from our negotiated supplier contracts, or get complete visibility into our spending patterns."

Some procurement specialists believe new models for delivering technology—such as the 0B10 network, and on-demand solutions—will spur wider adoption of procurement systems, and ultimately generate greater value for user companies.

Mike Rager, director of enterprise spend management at North Canton, Ohio-based security products maker Diebold, supports this notion after nearly a year of experience using an on-demand spend analysis application from Ariba.

"Ariba had been in place within Diebold for around five years, but as an e-auction tool without any spend management capability," he says. "We're now aggressively using it for spend visibility, and for the first time it's giving us a consistent set of information on what we're spending, and by specific categories."

Diebold could not get this clear view previously, Rager explains, because its spending information was spread across five ERP systems, and integrating those packages would have been costly. But Ariba's on-demand spend analysis tool, which was built to take data from disparate systems, easily merges all of Diebold's spend data into a central location.

"If we had tried doing things the traditional way, we'd still be in the data-gathering phase," Rager says. "Now we're looking at already-digested spend information, and acting on it. I can sit at my desktop, and click through the Web portal to the spend analysis tool, and see exactly how much we're spending with each supplier, and the 'parent-child' relationships that tell us what items we are buying from which suppliers."

On-demand technology, Rager believes, is set to materially change the world of not just procurement applications, but business applications in general. Says Rager, "Technology moves quickly—often faster than companies can install and implement—but on-demand lets you keep pace."