Why E-Procurement Doesn't Meet Expectations

By Tom Smith

Plain old inertia in corporate culture and business processes prevents companies from realizing the full financial benefits of e-procurement.

Although there are indicators to suggest technology hasn't necessarily matured enough to handle the bulk of corporate procurement, an InternetWeek.com reader poll and interviews with a number of experts indicate that people and companies just aren't changing quickly enough when it comes to taking corporate procurement activities online. That could be a particularly big problem for those companies that bring high hopes and big dollars to e-procurement automation efforts.

Most big companies have about 30 percent of their annual corporate "spend" under the auspices of corporate contracts through their sourcing processes, but only about 10 percent of that total is actually handled through e-procurement systems, said Pierre Mitchell, vice president of research at AMR Research.

"It's not due to technology per se," Mitchell explained. "When you talk about industrial [maintenance, repair, and operations] or capital equipment, it's a lot harder to get consensus that these are the categories you want to put on an e-procurement systems vs. just letting business units do their own thing."

Coming up short of expectations could draw the ire of senior management. In a study of dozens of companies' e-procurement efforts, AMR found that the average implementation of an indirect e-procurement system costs $6 million. Try telling your CFO he or she has just shelled out that kind of money for an automated procurement system that no one wants to use.

A survey of InternetWeek.com readers bears out Mitchell's analysis. We asked readers to tell us the biggest barriers to maximizing e-procurement benefits in their companies.

More than 70 percent of 91 respondents cited issues that could be classified as cultural. A full 48 percent of respondents—44 individuals—cited "culture/resistance" as the big barrier.

The other responses:

• 23 percent said ineffective processes are to blame

• 12 percent cited data quality

• 7 percent cited poor analysis tools

• 3 percent cited data consistency

• 7 percent said "other."

Readers also weighed in with comments on the issue.

"I think culture and resistance to change are the major factors slowing down companies that wish to take part in e-procurement," wrote Quis Shahin, e-procurement specialist for ATOS Origin in Dhahran, Saudi Arabia. "Change is always hard at the beginning and the best way to make it happen is to enforce it on all levels of the organization."

Shahin's sentiments are echoed by group director of worldwide procurement for Cadence Design Systems Kendall Mills, who spoke to InternetWeek.com offline. Mills said Cadence Design has succeeded in pushing a high percentage of spending through its e-procurement system, but it did so with something of a brute-force approach. "We put out a mandate that you have to go through the system or you won't get reimbursed. We told suppliers they won't get paid without an authorized purchase order."

Though the approach has been successful, maverick buying still crops up, particularly when Cadence Design acquires small companies that are accustomed to buying things as needed and therefore lack the disciplined procurement processes that are more typical in big companies.

One reason that e-procurement efforts may come up short is a failure to do enough upfront legwork to analyze which procurement should go through electronic systems, and to understand and evangelize the benefits of such systems.

Delta Air Lines Inc., for instance, has recently initiated use of a hosted e-procurement system. But its upfront effort involved a seven-step process of analysis for every item it procures, to fully understand the prospective benefits, explained Rick Plasket, general manager of strategic sourcing for Delta. "We've pretty much written in stone and committed that everything we source will at least pass through that process before we go to source anything," Plasket said.

Because of this lack of upfront preparation, and failure to adequately brace a company for the organizational change and acceptance that's needed for e-procurement, some companies end up scaling back their initiatives: A third of companies that ARM surveyed for example, cut back on the number of business processes, spend categories, and sites using e-procurement. "These users underestimated the organizational change management needed to align senior management, business units, IT, corporate purchasing, suppliers, and application vendors," AMR wrote in a research report on the subject.

Other factors are clearly at play as well. William Lin, e-procurement manager at Johnson & Johnson, stated emphatically that suppliers are a big stumbling block. "Supplier enablement is the biggest roadblock on our end. We have over 70,000 suppliers in our legacy system. How does one do THAT in a timely manner?" Lin asked in response to our poll.

We thank Lin and other readers for their input. And welcome you to respond to our poll.