The eProcurement Equation

  • By Linda L. Briggs
  • 11/01/07

The eProcurement EquationWhat do you get when big schools roll out highly effective eProcurement systems? Strategic improvements and savings. College and university administrators everywhere: Take note.

ePROCUREMENT SYSTEMS ARE hot again in higher ed, driven by unrelenting cost containment demands, along with industry shifts that have consolidated choices and brought top products to the forefront. What’s more, there are now a good number of eProcurement success stories out there, especially involving the bigger schools, and that makes it easier than ever for others to evaluate the leap to electronic purchasing.

That’s fortunate, since eProcurement promises substantial savings in several areas, including a) hard dollar cuts on purchases because better negotiations are generally possible with electronic contracts, b) savings on staff efficiencies across the board, and c) the ability to better analyze buying patterns after the fact.

At the 40,000-student University of Michigan, the biggest savings from the institution’s eProcurement system are coming from better-negotiated contracts, according to Judith Smith, director of procurement services at UM. The university, which spends a billion dollars a year on goods and services, is running a hybrid system consisting of Oracle PeopleSoft financials along with a hosted eProcurement system from SciQuest called HigherMarkets Express. (Earlier this year, CDW-G partnered with SciQuest, long a provider of on-demand supplier enablement solutions, to offer another SciQuestdeveloped eProcurement package to higher education. The CDW-G SciQuest solution is aimed at smaller colleges and universities and is not the system UM is using.) UM added the SciQuest eProcurement package as a standalone application in 2003; last year, the university integrated its purchasing data into its Oracle PeopleSoft financial package.

According to Smith, her biggest savings come from the ability to negotiate strategic contracts. That ability, she says, stems directly from the university’s eProcurement system. Because of the SciQuest system, she can add more vendors to the software setup—vendors with which she now has time to carefully negotiate contracts. "It’s not so much that we save time," says Smith, "it’s that we’re able to add many more vendors without having to add staff." She has doubled the number of vendors that users can choose from for their electronic ordering, and since the average savings from strategic contracts is 12 to 20 percent, "that’s the business case," she insists.

MAKING ePROCUREMENT LOOK EASY

AS CHIEF PROCUREMENT OFFICER for the University of Pennsylvania, Ralph Maier has saved millions of dollars for the school, where he appears to steer a sophisticated eProcurement system as instinctively as the rest of us drive to work. An expert in his field, Maier was generous enough to share the following tips on what has worked so well when it comes to reining in U Penn’s $625-million yearly procurement budget.

Benchmark compulsively. "We measure everything," Maier acknowledges. "We measure throughput. We measure efficiency. We measure performance," and much more, he adds, including total cost containment, new contracts awarded each year, how much spending is done within and outside of contracts, and the effectiveness of collaborative buying. The payoff: When it’s time to point out system efficiencies, or to objectively evaluate something that doesn’t seem to be working, the proof is right there in the numbers.

Speak the language of senior management. Phrases like "optimized supply chain management" and "leveraging your spend" might thrill finance folks, but they probably aren’t part of the preferred lingo of a university president. Instead, says Maier, illustrate the benefits of the new eProcurement system with dramatic, clearly documented returnon- investment (ROI) numbers. "That’s a powerful message," he asserts.

Think like a corporation. It’s no coincidence that Maier comes from a private industry background. "Penn is roughly a $4.5 to $5 billion-a-year corporation, disguised as a research and education institution," he points out. Clearly articulating the role of the purchasing department, and the potentially tremendous ROI that comes from better spending decisions, is key, he says. Consider that the second largest portion of any university’s annual operating budget is products and services. "Purchasing has the biggest chunk of leverageable spend," Maier says. "We use that to our advantage to say, 'Purchasing is important!'"

Allowing a university to manage the marketplace in this way is a typical benefit that eProcurement systems offer, according to Anthony Rotoli, CDW-G’s higher education business development manager. He says that big savings can result when contracts are properly monitored, allowing schools to better manage vendors, and to channel users to those vendors offering the best prices. And that’s exactly the kind of strategic contract savings Smith is realizing at UM.

Another big benefit of a systemwide eProcurement system: the ability to properly track spending. "The biggest thing we’ve done is to look at the different ways people are purchasing things," Smith says. "We’ll look at a vendor and see: Are we spending money on a [purchasing card], on the eProcurement system itself, on what we call non-PO vouchers, or on one-off requisitions?" Analyzing those spending trends enables an institution like UM to institute program and policy changes to alter purchasing behavior.

Savings in Efficiency

Saving time for both staff and users is another big area of cost-cut benefits, although the bottom line can be hard to calculate. The University of Central Florida, which through rapid growth has become one of the largest universities in the nation, has introduced greater efficiencies throughout its main and regional campuses with its Oracle PeopleSoft financial management software. Savings have been significant enough that this fall, UCF will extend the system by rolling out Oracle’s eProcurement module, Oracle iProcurement, as well.

Savings in efficiencies through process automation are another typical eProcurement benefit, according to CDW-G’s Rotoli. That’s because purchasing software systems can cut out most if not all tedious mailing, faxing, and phoning-in of orders. According to Aberdeen Group analysts who have studied eProcurement benefits for years, in efficiencies alone companies can save an average of $33 per order.

At UCF, the university’s size requires a system that streamlines requisition and purchase order processes, enhances purchasing card and vendor tracking information, and minimizes redundant procedures. As an example of staff time savings, the vast system allows individual departments and employees to create online reports themselves, freeing IT staff for other tasks. The growing university, which serves over 46,000 students in the Orlando area, had an operating budget of $817.5 million in the 2005-2006 academic year. Managing such sizable dollars demands a big, flexible financial system, according to Rebecca Vilsack, UCF’s associate controller and project manager for Oracle PeopleSoft Financials.

In a bold move back in 2003, management first rolled out the entire Oracle PeopleSoft core financial system, all at the same time. That included general ledger, purchasing, accounts payable, and asset management modules. Partly because of UCF’s success with that approach, they will roll out the eProcurement module the same way this fall—in one fell swoop. The university’s ultimate goal: to move the entire purchasing cycle online, from procurement to payment. That will include a catalog of supplier networks inside the eProcurement system, with everything pushed along automatically as a purchase makes its way through the system. "We’d like to have a self-service portal for our vendors, where they can check the status of their payment. We’d also like to enable electronic payments to our vendors," Vilsack explains.

MAKING ePROCUREMENT LOOK EASY

Market rather than mandate. One challenge of eProcurement systems in higher ed is that there are so many potential users, from professors to staff members—all of whom aren’t formal purchasing agents and so may utilize the system sporadically. But, an end user who understands a good eProcurement system and its benefits will use it without coercion. After all, once the newness factor wears off, it is almost always easier to buy something electronically than through a paper system. "While we do mandate compliance [with the eProcurement system]," Maier says, "our strategy is to market acceptance rather than mandate compliance." To that end, U Penn spends time educating the user community about the system, its benefits for the university, and especially how it can help users save time and get their purchases that much more quickly.

Push the ‘What’s in it for me?’ angle. Getting key people on board is a must for any big project. For continued investment and support, Maier names three mission-critical stakeholders to sell: senior management, faculty/staff, and the technology folks. "Everything we do has a kind of marketing twist to it," he says. "So we make sure that we understand what each stakeholder is looking for, what his or her hot buttons are, and then as we roll out new programs, we market to those business requirements."

UCF anticipates a number of benefits from adding the new eProcurement module, according to William Merck II, VP, administration and finance. Merck anticipates that those benefits will include the ability to show users the best sources for buying both goods and services—a major advantage of an eProcurement system’s online buying features. Merck and Vilsack also look forward to better record-keeping on purchases, which will in turn allow them to analyze spend patterns and negotiate better contracts. "When we have a better handle on the quantities we’re buying from specific vendors, we should be able to get better pricing," Merck maintains.

And that’s indeed one of the big eProcurement benefits, confirms CDW-G’s Rotoli. A large potential for savings comes on the back end, when spending data is collected in one place. By connecting the eProcurement system and financials in general to the university’s enterprise resource planning system, administrators can collect spending data for enlightening reports and slice-anddice analysis. That, in turn, can tease out further savings. Is too much buying happening off-contract? Are spending benchmarks being met? Could greater savings be realized with a different supplier? Answers to those questions come from analyzing where the dollars are flowing.

MAKING ePROCUREMENT LOOK EASY

Be patient. It’s taken 12 to 13 years, Maier admits, to get U Penn to where it is today in ePurchasing. "It’s continuous process improvement," he stresses. Indeed, it takes time to articulate the role and responsibilities of the purchasing department, and to gradually educate users and management about the tremendous savings potential. "We spent probably four or five years cultivating the notion of Purchasing as a value-added organization," Maier says. Today, with increasing pressure for spending management, the role of a Purchasing department as a cost containment organization is clear to everyone.

It’s not the software, it’s how you use it. Ultimately, how you use an eProcurement product is more important than which vendor you choose. The big question, Maier says, is: "Are you able to utilize [the eProcurement system] as a tool to produce significant results?" Addressing that issue up front can keep your school from looking back in 18 months and wondering where exactly that touted ROI is. Critical to success is changing the culture in the purchasing group to go with the system, Maier advises: "Just implementing technology is not going to change anything. If you don’t also restructure or change the culture in the purchasing organization, you’re not going to be able to leverage and maximize the investment in that technology."

Measuring Your ROI

Despite all the potential for cost savings, users say a challenge with any electronic purchasing system is documenting the return on investment (both projected and actual) on such systems, which are typically large and sprawling and touch many users and departments. ROI is important in making the initial business case for eProcurement system investment to the president and board, and in calculating the system’s effectiveness after the fact. To develop that business argument, you’ll need to set up metrics ahead of time, in order to gather data prior to installation, and thus supply comparison points. Oracle, for example, offers something called "Strategic Procurement Insight," a nocost service in which Oracle reps work on-site to show prospective customers what sorts of metrics they need to set up.

The savings most easily tracked are hard-dollar savings; drops in spending on materials can come from better use of negotiated contracts. Since implementing a formal self-service eProcurement system in 1996, for instance, the University of Pennsylvania has documented more than $100 million in savings on products and services. The Penn Marketplace, built on the Oracle E-Business Suite and Oracle iProcurement, supports some 1,700 users across the university. The centralized online supplier marketplace contributes to other savings, allowing Penn’s purchasing organization to manage its supplier relationships strategically, and to monitor overall spending.

9 TIPS TO MAXIMIZE A PURCHASING CARD PROGRAM

A PURCHASING CARD program can be an effective complement to a university’s overall eProcurement strategy. Global financial services firm JPMorgan Chase surveyed its university purchasing card customers to gather and share the following best practices:

  1. Increase visibility into spending with online payment management tools.
  2. Use technology to better leverage vendor discounts. Generate reports to track spending, then use the data to negotiate better deals with vendors.
  3. Partner with a card issuer that takes a consultative approach to ramping up and growing your program.
  4. Establish controls and business rules to prevent innappropriate card usage and rogue spending.
  5. Mandate training for all users before a purchasing card is released.
  6. Build a strong web presence for your card program administration, to help promote your initiative and save time answering participants’ questions.
  7. Communicate effectively with cardholders, both online and via newsletters or other publications.
  8. Establish ghost card programs with high-volume vendors. A ghost card is an account number with larger spending limits, assigned to a specific vendor. This allows purchasing card program managers to track and reconcile activity on the account and implement additional controls over spending.
  9. Network with other purchasing professionals to gain insight into their challenges, successes, and learning experiences.

Source: Adapted from the JPMorgan Chase whitepaper "Purchasing Card Best Practices for University Procurement".

Beyond hard dollars, efficiencies within the purchasing department and across the campus are more difficult to measure. Transactions, for instance, can happen with far less—or even no—involvement of a legitimate university buyer. Instead, the user’s requisition passes through all the necessary checks via the software system, freeing the university buyers for more strategic work such as vendor management and contract negotiation.

That streamlined purchasing process is a key savings that UCF, for one, is looking forward to. With transactions moving through the system more quickly and smoothly, "the time savings throughout the university will be of great value to us," Merck says. He anticipates benefits ranging from time saved per transaction, to users receiving goods and services that much faster.

Planning Your Rollout

One of the beauties of eProcurement is that you don’t have to roll out the new system across the entire institution at once. Of course, you may prefer to follow UCF’s approach and just rip off the bandage, but you may decide instead to produce good results in one area, then use that as leverage to market the new system’s use to other departments.

KEEP IT SIMPLE

A KEY REASON that your eProcurement system needs to be uncomplicated is what Oracle VP Jim McGlothlin calls "the incidental buyer." Unlike corporations, where purchasing typically is performed by agents who spend lots of time with the purchasing software, universities might have hundreds or even thousands of buyers, some of whom may jump into the system once or twice a year to make their purchases. For those reasons, as you evaluate eProcurement systems, keep in mind that the purchasing process needs to be very simple.

For basic user purchases, your system should resemble the tried-and-true approach of a purchasing front-end megalith like Amazon.com. Users already know how to visit such websites, select products, and drop them into shopping carts; it’s a structure we’ve all grown used to.

Another point, adds McGlothlin: There’s a great need in universities for purchasing not just goods, but services such as cellular phone service. By setting up that sort of purchase as just another line item, you can still let users take advantage of simple eProcurement procedures. For more complex services, such as contracting with a consultant, you’ll probably need eProcurement software with a services procurement capability, but look for one that works just as simply as purchasing a product.

Newer to eProcurement is the capability to handle online strategic sourcing. That means the ability to gather competitive bids from suppliers, run reverse auctions, and perform other more sophisticated procurement tasks, throughout the program. Those capabilities, popular currently in the corporate world, McGlothlin says, will most likely migrate to higher education soon.

Two years ago, in fact, Rensselaer Polytechnic Institute (NY) opted for a gradual six-month rollout of its eProcurement system that began with the School of Engineering, according to Ann Crislip, director of the purchasing department, and Kevin Smith, associate director. Today, except for staffers on a small satellite campus, no one at RPI uses paper to complete a purchase order. One big benefit of the new system: Even multiple levels of approvals can be handled remotely—from finance and property management, to research and risk management— since physical signatures are no longer required on purchase orders.

Rensselaer moved from its manual procurement system in late 2005; today, it employs SciQuest HigherMarkets, which RPI has integrated with the SCT Banner ERP software that it uses for managing financial and business processes. (In 2002, SciQuest acquired HigherMarkets, a company focused on the procurement needs of higher ed.) Some 450 users, ranging from administrative assistants, financial managers, deans, and professors, all the way to the institution’s president, use the system to make purchases. Rensselaer specifically sought out an eProcurement partner with the ability to manage online catalogs for purchasing, as well as online requisitions for those vendors without electronic catalogs. But through SciQuest, RPI purchasers also can submit paper requisitions to those vendors that lack e-catalogs.

Rensselaer administrators performed an initial—and favorable—projected ROI assessment when they prepared the internal business case, Crislip discloses. With a solid year-and-a-half of eProcurement under its belt, RPI now has another report in the works that will examine both actual hard- and soft-dollar savings, including efficiencies in the purchasing department. Even without numbers in front of them, both Smith and Crislip say the savings are clearly there. For one thing, a full-time position in accounting has been reallocated due to system efficiencies.

Since pressure on schools to rein in spending won’t subside anytime soon, ePurchasing is likely to continue to expand. That means more vendors participating, further refinements of software systems—and more benefits for schools that jump on board.

::WEBEXTRAS ::
When schools band together to purchase technology, buying power and benefits abound. More eProcurement case studies.

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