Inefficient Procurement Processes Cost Companies $1.5 Billion

By John Hall

September 24, 2014 at 8:48 AM

Peerless procurement organizations seem to do everything right. A recent Hackett Group study found that such organizations outperform others in just about every important metric – from cost savings and service delivery to cost reductions and an enviable 9-to-1 ROI – all with nearly a third fewer people than anyone else. 

One of the key ways these so-called “world class” organizations differentiate themselves today is in their ability to provide keen analytics-backed information at a rate twice that of their lesser counterparts. According to new research from Topline Strategy Group, a firm that claims to specialize in helping technology-based companies align their solutions with the needs of the market, many of those counterparts today are struggling with inefficient procurement processes that are impeding their ability to perform even the most fundamental functions like identifying savings and cost reductions and harnessing greater swaths of spend under contract.

Topline estimates, in fact, that the phenomenon is costing North American companies as much as $1.5 billion and wasting 32.3 million man hours per year.

‘Massive Productivity Gap’

The company says it surveyed 241 sourcing and finance professionals at more than 200 American companies with at least $500 million in revenue to determine the steps organizations can take to achieve a positive return on their procurement investment. The research was sponsored by SciQuest, a large provider of cloud-based business automation solutions for spend management.

The study, “Optimizing Your Sourcing and Procurement: Five Simple Rules,” covers the entire source-to-settle process and includes both sourcing and purchasing, according to Jonathan Klein, President of Topline. 

J Klein_Topline.jpg“On the sourcing side, the research addressed software solutions for eSourcing, supplier management, contract lifecycle management and spend analytics,” Klein tells My Purchasing Center. “Our study was designed to isolate the effects of the software systems. The 32.3 million hours is specifically the time that people spend on tasks that are automated or can be accomplished faster with ‘better’ software.” 

Nearly three-fourths of surveyed sourcing and procurement professionals do not believe their current systems make them more productive – a phenomenon Topline says “amounts to a massive productivity gap eating away at bottom lines.” And that gap can be costly in ways beyond actual costs, according to the firm. For example, nearly 70% of respondents who say their procurement systems do not make them more productive say that they would use the time lost to inefficiency to find more savings opportunities, guide purchasers to make better choices, consolidate more spend categories under contract, purchase more cost-effective items and get more bids per tender.

“Today, most companies are not receiving all of the value they can from their investment in sourcing and procurement systems,” the company notes. “Far too many are not obtaining any value at all.” 

Other key findings in the Topline report:

  • More accessible and intuitive software solutions can go far in curbing unplanned spend and saving money. Nearly 80% of respondents say their employees would find better deals and save their company money if corporate procurement tools were easier to use; roughly the same say such tools also reduce so-called “rogue spending.”
  • Software systems require regular fine-tuning and updates or run the risk of quickly becoming obsolete. Nearly half of respondents who use technologies like software-as-a-service (SaaS) to routinely improve their system with new features and capabilities report being more productive as a result. 
  • Messy or confusing user interfaces are a key source of dissatisfaction among more than half of those respondents who say their current systems fail to make their procurement processes more effective. And nearly 40% say their current systems lack critical features.
  • Among respondents who use at least two software applications from the same supplier, few (16%) indicate both made their procurement teams much more productive. ERP integration, meanwhile, doesn’t appear to be much of a deal breaker; only 6% of respondents indicate such a feature is a key driver of satisfaction. 
  • It matters less who performs a software solution implementation and more the level of resources applied and the experience of the people completing the work, according to nearly three-quarters of the respondents.

Harnessing the Power of eSourcing

 Greg_Holt_Sciquest.jpgAccording to Greg Holt, Product Marketing Director for SciQuest, intelligently chosen and thoughtfully implemented software solutions are critical to maximizing the power of strategic sourcing to reduce costs and generate savings.

“Reducing costs is the primary goal of strategic sourcing,” Holt tells My Purchasing Center. “Even when market conditions cause prices to increase, a strategic approach to sourcing can help find cost reductions beyond the price point paid for the items being sourced, by leveraging volume, finding supplier innovations and efficiencies, and responding more quickly to changes in your business.

“eSourcing technology helps generate competition, evaluate more suppliers (rather than just calling on a couple of known suppliers), and reduce the cost of the sourcing effort itself by automating many of the steps required to manage the process,” Holt adds.

Many argue that software solutions are only as good as the competency of people using it. But as Topline finds in its study, even the most savvy procurement professionals can be quickly stymied by clumsy or incomplete systems.

“For survey respondents who say that their system does not make them much more productive, we asked how many hours per week could be saved with a better system and then followed up with a request for specific examples of how their system cost them time,” Klein says.

“One user of an eSourcing system tells us that system limitations often required them to gather RFP (Request for Proposal) data from suppliers via an attached Excel® spreadsheet rather than being able to encode the RFP into the system - the way eSourcing systems are supposed to work,” he adds. “This results in extensive time spent consolidating spreadsheets and conducting analysis in Excel that a ‘better’ system – one that had the flexibility to encode the RFP directly into the system – would eliminate.”

Rules for Maximizing ROI

Based on its survey, Topline suggests the following five rules for organizations interested in maximizing the return on their investment in procurement systems. 

  • Choose the right software. “Identify a small set of critical business processes and functions that the system has to support—the ones that will drive the greatest increases in productivity. Make those deal breakers. If the system cannot handle them, then they are off the list. 
  • Don’t get caught up in vendor standardization. Too often, organizations give up a lot of features by assuming a single vendor will save money or provide a logical solution for both sourcing and procurement functions, especially if the vendor doesn’t offer the right solution for all applications. 
  • Invest in implementation, whether it involves outsourcing to a third-party of deploying internal talent.
  • Frequently update and improve the system.
  • Use software that is easy for casual, occasional users needing to perform routine tasks such as making purchases, approving purchases, and reviewing reports.

 



Tags: purchasing Supply chain management Procurement Technology Software sourcing
Category: News Article

John Hall

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John Hall is a freelance writer who reports on commodities markets and procurement and supply management topics for My Purchasing Center. His website is jhallmedia.com


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