It is sobering to think that many of the eBusiness decisions that have taken place appear to be been done in abject isolation of standard corporate strategy principles.

1. The Strategic Route to eProcurement Success
JULIAN CURTISS (PURCHASING DIGEST, CONFERENCE EDITION, 2001)
Michael Porter recently said “the new economy is just the old economy with access to
new technology” (Porter, M. (2001): Strategy and the Internet, Harvard Business Review, Volume
79 – Number 3: Harvard, USA). If the Y2K Bug taught us anything, it should have been
that that the organisation, in its pursuit for operational efficiency through the
leveraging of new technology, should be aware of the limitations and possible long
term effects that technology may have on its activities. It should also have ushered the
business managers back into the driving seats of technology decisions, and placed IT
firmly in its place, as an integral support function of the business. Technology
decisions should never be taken in isolation of the business process they are intended
to support and those business processes should never exist in isolation of the
organisational strategy they are there to deliver upon.
With this in mind it is sobering to think that many of the eBusiness decisions that
have taken place in the last 20 months appear to be been done in abject isolation of
standard corporate strategy principles. It is this that Porter alludes to. Interestingly he
applies two of his legendary business models to the “Internet” world and arrives at
some interesting conclusions. The models referred to are the “Five Forces Model” and
“The Value Chain”, business models all to familiar to business school students yet
mostly lost on technology managers.
In these models Porter encourages the strategist to look first at the nature of the
organisation’s environment (The Five Forces Model) and then to look at the manner
in which the organisation plans to operate within this environment (The Value Chain).
The Five Forces Model The Value Chain
Porter is concerned that the departure from conventional strategic thinking is what lies
behind the “Dot-Bomb” failures that we have seen. This is not too far fetched. Stock
market analysts threw away their rulebooks when measuring the value of dot-com
businesses, so why shouldn’t the businesses themselves do the same?
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2. THE STRATEGIC ROUTE TO EPROCUREMENT SUCCESS
The reality is that businesses HAVE TO return to the tried and tested methods of
measuring the viability of any business project such as Return on Investment (ROI)
modelling, Discounted Cash Flows (DCF) and the good old Business Case.
The reality here is that very often the business case for an endeavour such as
eProcurement can seldom be proved with the above methods. The reason lies in the
profile of many organisation’s spend. Below is an example of a typical manufacturing
organisation’s spend.
Capital Equipment expenditure is of sufficiently high value and low volume to justify
the close personal attention of an experienced buyer. Direct Goods are of sufficiently
high strategic value to justify the close personal attention of an experienced buyer, as
are Strategic Indirect Goods. It is no good buying the best components for your
production line if sub-standard bearings bring it to a halt. The savings an organisation
can hope to achieve from an intervention in these categories of spend are usually
related to the Sourcing component of Strategic Procurement and not the transactional
component. As eProcurement derives most of its business case from the anticipated
transactional savings it is clear that the case will seldom be made for eProcurement in
this category of spend.
Recently, with many of the eProcurement software vendors releasing Auctioning
technologies, there have been claims that they can indeed add value to the sourcing
component of procurement. The key issue here lies in the fact that auctioning, or
reverse auctioning, is most effective when Price is the critical element and not quality
or supplier performance. While this technology can technically handle these issues,
computer systems are typically not predisposed to making soft decisions. On supplier
performance, this can only be tracked after a reasonable period of time (say, one year)
and therefore is not of immediate value. There have also been concerns raised by the
Chartered Institute of Procurement and Supply (CIPS) in the United Kingdom on the
impact of reverse auctioning on supply chain stability. Reverse auctions have the
potential to create price wars if not used responsibly and in adversarial supply
markets, such as South Africa, this could be particularly damaging. A protracted
period of low pricing will squeeze out smaller suppliers, reducing the supply base and
ultimately result in higher prices. Just look at the airline industry in South Africa. In
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3. THE STRATEGIC ROUTE TO EPROCUREMENT SUCCESS
terms of strategic goods, it is unlikely to be in the organisation’s best interests to use
this tool, and therefore its case for use is limited.
Traditionally, the Maintenance, Repair and Operational (MRO) costs are a classic
target for cost saving interventions through reducing process costs, due to their low
value, high volume nature. However with Strategic Indirect procurement removed the
case becomes less compelling in this category of spend. The technology itself is
compelling. It offers the organisation the ability to bring self-service procurement to
the users in the organisation for stationery, computer equipment, services and travel.
Additionally, in terms of its profile, this category of goods is weighted on price, and
therefore reverse auctioning technology comes into its own. The challenge the
organisation faces however is that with the reduced transaction volumes, it becomes
harder to justify the business case for eProcurement software. Recently South Africa
has seen the introduction of a number of ASP (Application Service Provider)
eProcurement offerings, such as Miraculum from Dimension Data, MyMarket.com
from Bidvest (a Supplier portal) and Buyit from Scion (a Member of the First Rand
Group). The critical issue at this stage is that with the exception of Buyit, they only
address the buying element of the purchase-to-pay cycle, while invoicing and
payment actually account for up to 60% of the cycle costs. This reduces the potential
savings even further and therefore in some cases even the ASP offering is
unsustainable.
When embarking on eProcurement, whether internally or through an ASP, it is useful
to consider what Porter says about the Internet’s impact on the bargaining power of
suppliers:
Procurement using the Internet tends to raise bargaining power over suppliers,
though it can also give suppliers access to more customers;
The Internet provides a channel for suppliers to reach end users, reducing the
leverage of intervening companies;
Internet procurement and digital markets tend to give all companies equal
access to suppliers and gravitate procurement to standardised products that
reduce differentiation; and
Reduced barriers to entry and proliferation of companies downstream shifts
power to suppliers.
This can impact industry stability in the following ways:
Reduces differences among competitors as offerings are difficult to keep
proprietary;
Migrates competition to price; and
Lowers variable cost relative to fixed cost, increasing pressures for price
discounting.
Bill Gates said that the Internet has the potential to fundamentally reshape the way we
do business. He didn’t say it will change the business we do. As strategy determines
“the business we do” it is important therefore for the organisation not to lose sight of
this in its pursuit to leverage the benefits of the “new technology”. What is clear is
that eProcurement is not a technology decision. It is a strategic business decision that
has at its heart the ability to leverage the benefits of a new technology to reduce costs.
It is a decision that that must therefore be made strategically.
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4. THE STRATEGIC ROUTE TO EPROCUREMENT SUCCESS
ABOUT THE AUTHOR
Julian Curtiss holds a Masters of Business Administration from
Thames Valley University in the United Kingdom. He has more
than ten years experience in IT business consulting. He worked
for three and a half years in the United Kingdom consulting to
small and medium businesses. In 1995 he returned to South
Africa where he worked for IBM South Africa, initially
implementing JD Edwards software and then working as a
Market Segment Manager, designing custom supply-chain
solutions for the travel related services, agricultural and retail
industries. After IBM Julian worked for FirstRand Bank in the
capacity of eCommerce Strategist, initially in the Card Division of FNB and briefly
thereafter for MC2, now Hyphen Technology (Pty) Ltd. Most recently Julian held the
position of Head of B2B eCommerce at Prism Transactive, a division of Prism
Holdings Ltd.
Julian is currently a regular contributor to the procurement industry journals. He is
also project managing the implementation of an eProcurement solution at a large
financial institution.
© TRANSACTION TECHNOLOGY SOLUTIONS -4- 16 January 2009