E-procurement tools include features for creating and managing requisitions, hosted catalogs and supplier-maintained catalogs, purchase order (PO) management, and receiving and reconciliation. These applications allow organizations to monitor and control spend, and they streamline users' processes for procuring the goods they need to do their jobs.
The ROI of implementing electronic procurement (e-procurement) software is well documented, as the tools have the potential to save companies millions in annual processing costs. E-procurement software is a viable option for organizations looking to increase process efficiency and improve their bottom line. While the benefits of e-procurement tools are clear, a few questions remain around what types of organizations are most in need of e-procurement software, and when they should implement it.
Who needs e-procurement software?
It's important to understand what traditionally leads organizations to implement e-procurement software. In general, the leading motivator for adopting an automated system is to lower the high costs and pain points that result from manual requisition and approval processes. In market research conducted by PayStream Advisors, organizations were asked to pick the top three reasons they would implement e-procurement software in their procurement processes. Most organizations want automation in order to achieve streamlined requisition and purchasing processes, greater visibility into spend, improved security and reductions in fraudulent or maverick spending, and an overall reduction in procurement costs. The figure below gives a comprehensive picture of the why organizations feel the need to implement e-procurement software.
Revenue and industry sector play a big role in which companies select an e-procurement tool. The majority of organizations that purchase e-procurement tools are businesses in the upper middle market -- reporting between $500 million and $2 billion in annual revenue -- and enterprises -- reporting above $2 billion in annual revenue. These organizations are large enough that their inefficiencies are too costly and widespread to fix with manual-based strategies. In addition, organizations in industries that involve a high number of indirect purchases, such as healthcare, higher education, professional services and financial services, are more likely to use e-procurement software than a manufacturing or retail company. This is because organizations in those latter industries order larger amounts of direct goods and will typically adopt more holistic source-to-settle systems -- systems that perform sourcing and contract management -- that easily integrate with supply chain and logistics software.
Smaller and lower middle market organizations, or those making less than $500 million in annual revenue, tend to have smaller purchasing departments -- if they have a separate department at all. Their processing pains are often easier to identify than those of a multibillion-dollar company, and can be simpler to control. Therefore, investing in an e-procurement tool is not always a realistic option for their budgets, or they realize they would receive a higher ROI on another automation tool, such as accounts payable software. There are exceptions to this rule; for example, smaller organizations are more financially crippled by the high costs of inefficient processes than a large company with more revenue to spare. However, overall market trends show that market leading e-procurement tools are more often adopted by organizations in the upper middle- and enterprise-level markets.
Sometimes size has little to do with whether or not a company adopts a procurement automation tool; the company's culture and structure can also play a role. The internal members who have the greatest hand in promoting a procurement automation initiative are usually the CFO and chief purchasing officer (CPO), even though they will not be the primary users of the system. The professionals who are most affected by inefficient procurement processes are junior personnel, such as office managers (requisition approvers) and various professionals throughout the organization (requisitioners). However, at the end of the day, it is up to key, upper-level decision makers to see the value of the software and actually move an adoption forward. If these executive members do not see the cost-to-value of the system in the long run, or if their businesses are not ready for the transformation, the procurement process will likely continue on with its current challenges.
When is a company ready for a procurement process transformation?
PayStream has found that most companies looking for e-procurement tools have similar business environments and characteristics that make them suitable and ready for software adoption. For example, some of these organizations will be in an important stage of technological transition: They will often be in the process of moving from on-premises to cloud-based software with the majority of their back-office financial systems. These organizations will likely be evaluating a variety of cloud-based business applications at the same time so as to create a holistic transition. Modern, cloud-based e-procurement tools are one of the vital elements in back-office transformations and are often included in these initiatives.
Another factor is an organization's supplier base. After years of operating with manual, localized procurement processes, many organizations end up with very outdated vendor lists and contracts and are consistently making inefficient purchases simply because that's how it's always been done in that company. With cloud-based procurement, organizations have access to online supplier networks with thousands of registered suppliers with which they can connect. They also have access to supplier optimization tools that allow them to clean up their vendor lists, create more competitive contracts and gain more visibility into current market prices.
It is often the case that the organizations that have recognized a need for e-procurement software have run an extensive current state analysis on their procurement departments to determine the full scope of damage caused by manual processes. They have also likely run these numbers against the price of an e-procurement tool, and in most cases, they have found that the possible savings available with automation quickly and greatly eclipses the cost of the e-procurement software itself. These organizations have realized that transformation is the only way forward, and that e-procurement software is not a costly luxury but a strategic necessity.
PayStream Advisors specializes in helping organizations evaluate both their current and future procurement states based on pre- and post-automation initiatives. For more information contact the author.
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