Purchasing
The eProcurement Equation
- By Linda L. Briggs
- 11/01/07
What 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:
- Increase visibility into spending with online payment management tools.
- Use technology to better leverage vendor discounts. Generate reports to
track spending, then use the data to negotiate better deals with vendors.
- Partner with a card issuer that takes a consultative approach to ramping up
and growing your program.
- Establish controls and business rules to prevent innappropriate card usage
and rogue spending.
- Mandate training for all users before a purchasing card is released.
- Build a strong web presence for your card program administration, to help
promote your initiative and save time answering participants’ questions.
- Communicate effectively with cardholders, both online and via newsletters
or other publications.
- 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.
- 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.
