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Procurement-Technology Investments Produce Big Payoffs

Companies that spend 27% more than their peers on procurement technology spend considerably less on procurement operations, a Hackett Group study reveals.

They're staggering numbers: $160 million in 2003 and another $100 million last year. That's how much Agilent Technologies Inc. saved in indirect procurement--purchases of items not used to build its scientific-instrument products--since spending tens of millions of dollars the past three years on its Oracle enterprise-resource-planning system's procurement modules.

Agilent, the Hewlett-Packard spin-off with 2004 sales of $7.2 billion, is what The Hackett Group characterizes as a world-class company. Hackett, a business-process advisory firm, said in a report issued Tuesday that world-class companies spend 27% more than their peers on procurement technology. In turn, these companies spend 27% less than typical companies on total procurement operations.

For each $1 billion spent on procurement, according to Hackett, world-class companies invest an average of $1.4 million on procurement technology compared with $1.1 million for typical businesses. Yet, the world-class enterprises earmark 0.74% of corporate expenditures on procurement operations versus 1.01% for the average company. Viewed from a different perspective, leading-edge companies allot 19% of operational spending to technology compared with 11% for typical companies.

Plus, Hackett says, world-class companies employ 38% fewer procurement personnel. World-class companies invest 94% more in technology for each labor-dollar than the peer group.

To achieve a world-class designation, a company must score in the top 25% of Hackett's database in efficiency and effectiveness in a given functional area, such as procurement.

Few back-office functions have had a more dramatic impact on technology this past decade than procurement, says Christopher Sawchuk, Hackett senior business adviser. "The best procurement organizations utilize technology to help them deal with lower value-added activities, which frees up funds and staff time, some of which can then be invested elsewhere," Sawchuk says.

Less effort spent on transactional tasks means executives can drive their organization to leverage their spending more effectively. "All this can help turn procurement into a virtual profit center," Sawchuk says.

Adopting a technology standard that lets a company create its own invoice for purchased products helped Agilent streamline its procurement process, which makes verifying receipt of an order simpler. "It allows us to cut down one more step in the procurement process," says Anita Manwani, Agilent VP and general manager of global sourcing.

Automating procurement gives Agilent executives worldwide more visibility on where they're spending money, which in turn helps leverage the company's buying power. In addition, Manwani says, Agilent has sharply reduced the number of vendors it deals with, making it easier to negotiate better deals.

"This has been a challenging process," Manwani says. "It's not an exercise you do every two years. It involves lots of investment, and discipline to manage such a return on investment."

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