July 26, 1999

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Procurement Pays Off

Companies are finding that procurement software comes with a quick ROI

By Charles Waltner

Related links:

TI Purchases To Go Online

And from our sister publications:

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lain-Michel Diamant-Berger, procurement process leader at Schlumberger Ltd., an oil drilling services company, admits he tweaked the numbers a bit when he estimated the return on investment for a planned deployment of Commerce One Inc.'s Commerce Chain Solution procurement system to make the final numbers more palatable to his CIO. Usually such adjustments are done to improve return on investment projections, but in this case, Diamant-Berger didn't want the numbers to look too good, even though he was confident his calculations were sound.

Diamant-Berger's estimates of how much his New York company would save annually in the first five years after the implementation showed a return on investment of a couple of thousand percent. "My CIO would have thought I was crazy if I brought numbers like that to him," he says. "It's safe to say the return on investment was never a problem with this project."

The final ROI estimate he presented to the CIO was 335%. The company is in the first year of rolling out the application, and Diamant-Berger says his boss is pleased with the ROI of the application. Indeed, most IT executives say online procurement software provides about the highest ROI of any enterprisewide application, often paying for itself within a year.

Procurement systems let companies consolidate purchases, giving them power over suppliers. These systems also reduce unauthorized spending and administrative costs, help companies track spending patterns, and boost internal efficiency. But there's a price for these gains. The software is expensive and can be tricky to integrate with internal systems, and the products currently available can't meet all of a company's needs.

Forrester Research estimates that the market for products and services that let companies conduct purchasing over the Web will grow from $62 million in 1998 to $900 million by 2003. There are about two dozen vendors in the online procurement market. Typically, their applications let any employee order--through managed access rights--nonproduction supplies and services from an online catalog using only a Web browser. They simplify the process of purchasing the day-to-day items necessary to operate a company, from office chairs and PCs to electrical wiring and coffee cups. Many of these applications can also manage spending on contract employees or consulting services.

Online procurement applications can cost as much as other enterprisewide deployments. Erica Rugullies, a research director at Giga Information Group, says the software licenses for these tools run $1,000 to $10,000 on the low end from such vendors as Trilogy Software Inc.; $70,000 to $300,000 for midrange deployments from such vendors as Concur Technologies Inc. and Clarus Corp.; and $500,000 to $4 million for high-end online procurement software from such vendors Ariba Inc. and Commerce One Inc.

Rugullies says implementation costs can run one-half to three times as much as the software costs for enterprisewide implementations. And integration with existing computer operations, such as accounting systems for executing the purchase orders generated by the electronic catalogs, can be nettlesome. Two-thirds of the 40 early adopters surveyed by Forrester Research for a recent report said vendors need to offer better integration.

The Forrester report points out that procurement applications are still fairly new, and while most do some things well--such as workflow, connectivity, analysis, or catalog management--none does everything well. That means companies opting to automate procurement today often have to use different tools from different vendors, which creates its own problems.

Choosing the right online procurement system can also be difficult and confusing, because those currently available include software applications, services, and hybrids of the two. Some are designed for specific industries or product categories, while others are more generic. And fee structures include license payments, monthly charges, and transaction fees.

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