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August 2012

eSourcing Report 2012


TABLE OF CONTENTS
EXECUTIVE SUMMARY ................................................................................................................. 3 ESOURCING BEST PRACTICE PROCESS ........................................................................................... 5 INTRODUCTION ........................................................................................................................... 6 FINDINGS FROM THE ESOURCING SURVEY & FORUM DISCUSSION ................................................ 7 CONCLUSIONS ........................................................................................................................... 28 APPENDIX: ABOUT THE RESPONDENTS ....................................................................................... 29 HOW CAN STATE OF FLUX HELP? ................................................................................................ 32 KEY CONTACTS........................................................................................................................... 35

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EXECUTIVE SUMMARY
Background The objective of this survey is to gauge the state of eSourcing across organisations, the current level of maturity and to enable organisations to benchmark themselves against others. The report is informed by the 80 organisations that contributed to our study including over 25 FTSE 100 / Fortune 500 companies. For this survey we define eSourcing as a suite of collaborative, web-based tools that enable procurement professionals, business stakeholders and suppliers to conduct sourcing activities from research and RFI through to contracting over the internet. Of those who participated in the eSourcing survey we found that 62% had been using eSourcing tools for less than 5 years and over 70% did not use any contracting functionality. This confirmed our suspicions that although these systems have been around for 15 years or so they are still far from core to the average users sourcing process.

Benefits Over 60% of respondents felt that the benefits delivered by eSourcing outweighed the cost with 30% believing that the benefits far outweighed the costs. Less than 10% of respondents believed the costs of eSourcing outweighed the benefits. We found that the key benefits from eSourcing and eAuctions included an improved transparency and audit trail (potentially leading to fraud reduction), more standardised processes and increased savings (particularly significant for eAuctions).

Challenges Despite the benefits, most organisations use eSourcing for less than half of their sourcing requirements. Their key challenges are around the complexity and lack of flexibility of many tools, which adds time and effort to the process rather than reducing it. They think that the tools are not designed by procurement people for procurement people, which limits their appeal. Finally there is a lack of resource and commitment put into change management. The money and effort put into acquiring the tool is usually far greater than the investment put into communication, training and set-up, to enable users to utilise the tool efficiently and effectively. This lack of resource and commitment is the area most within Procurements power to address. With 17% of established users doing over 500 eRFX a year and delivering 10-30% additional savings, it is clear what can be achieved. Change management must be the key area of focus when taking eSourcing programmes forward. If not, then the significant investment in the tool will be wasted and eSourcing will remain an administrative burden rather than a facilitator of best practice procurement delivering real benefits to your organisation. The survey and our experience of eSourcing mirror our experience of Procurement more generally. While a number of organisations are making significant strides forward and delivering increased value across all areas of spend, most still have a limited remit. While organisational culture will have some impact, we believe it is Procurements inability to sell itself and the benefits it delivers, particularly softer benefits, which are holding it back.

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Looking at the success stories, these have been achieved through an eSourcing plan which delivers incremental benefit year on year and does not over promise. Organisations have an increasing focus on risk and value beyond cost out, eSourcing can provide significant support in these areas and they need to be emphasised, when seeking a mandate from allies in Finance, Legal and on the Board. Perhaps the simplest way to kick start an eSourcing programme is to run a few eAuctions. They can easily be run through a low cost standalone service and provide great publicity through the buzz generated around them and the significant savings delivered. Some organisations have displayed them through their intranet to raise wider awareness across the business. Over 50% of organisations did less than 5 eAuctions last year, which we find very surprising given the level of savings achieved. We regularly see in excess of 20% savings over tendered prices in the eAuction programmes we run.

Topics of Interest We would like to thank all those who took the time to complete the survey and attend the eSourcing forum which took place in July. Areas that participants are keen to discuss at the future forums include: o Adoption, change management, buy-in and implementation o Training and development o eAuctions (set up, weighting, expanding programmes) o Integrating eSourcing with sourcing strategies
Yesterday was a very useful meeting and I look forward to future sessions. Thank you for facilitating such a productive forum. I believe that we touched on some very interesting topics and have a great deal of food for thought ahead of the next session. -forum participant

How we can help State of Flux has experience in helping its clients design and implement change programmes from streamlining processes to delivering training and communication plans. To discuss any of the points in this report please call Dominic Hastings on: +44 (0)207 842 0600. You also welcome to join the State of Flux eSourcing Practitioners online forum on LinkedIn.

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ESOURCING BEST PRACTICE PROCESS

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INTRODUCTION
eSourcing is a suite of collaborative, web-based tools that enable procurement professionals, business stakeholders and suppliers to conduct sourcing activities from research and RFI through to contracting over the internet. It has been hailed as a faster, more transparent and fairer way of facilitating tenders and conducting negotiations with suppliers since the late 1990s. It facilitates smooth and clear communication, and it can bring both financial and non-financial benefits. Throughout the report we primarily focus on eRFX and eAuction elements of eSourcing as these are the areas people most commonly utilise. Marketing for the various software packages presents a very positive picture, yet we were keen to find out if the reality matched this by looking at systems usage and what the main benefits and barriers are in a time when technology continues to advance rapidly. We had over 80 organisations contribute to our study including over 25 FSTE 100 / Fortune 500 companies. The objective of the survey was to gauge the state of eSourcing across organisations, the current level of eSourcing process maturity and to enable organisations to benchmark themselves against others. The survey was followed by a forum, which provided the participants (and State of Flux) an opportunity to reflect upon the results and comment on trends that the survey highlighted. Participants of the forum told us that they got a lot of value out of the discussion and were keen to have a second forum to cover further topics in autumn 2012. We would be pleased to welcome more members to join future forums and we are looking for a potential host for the next one. Please let us know if you would like to become a forum participant (see contact details and web links at the end of the report). We hope that this report provides you, as a practitioner, with a good picture of the state of eSourcing in 2012, along with insights, benchmarking data and ideas to help you launch, establish and develop best-in-class eSourcing in your organisation. Please contact us if you would like to discuss any of the issues raised by this report. You will also be most welcome to join the State of Flux eSourcing Practitioners online forum on LinkedIn where you can engage in discussions about the challenges, trends and effective practices in eSourcing with your peers.

Thank you to all those organisations that participated in the first State of Flux eSourcing Survey and to those who attended the subsequent forum we hope to see you at the next one.

Dominic Hastings Executive Consultant

Emily Richardson Consultant

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FINDINGS FROM THE ESOURCING SURVEY & FORUM DISCUSSION


The following information was gathered both through the responses to the survey and from discussions at the eSourcing forum held in London on Monday 2nd July 2012. There were 19 participants representing 14 organisations both in person and via WebEx from a range of industries. The forum lasted 3 hours and during this time we covered a range of topics and had discussions which have helped to inform this report. 80 organisations responded to the survey online and of this number, over 25 were FTSE 100/Fortune 500 companies. The survey respondents were requested to respond on behalf of their organisations as opposed to their own personal experience. At points in the report we may compare results with one of the key questions we found most interesting which was a telling metric about the maturity of sourcing in an organisation. We used the four levels to divide the survey respondents into groups and we predominantly set the divide as those who are a level 1-2 (undeveloped or developing) and those who are at a level 3-4 (established). Figure 1: HOW WOULD YOU DESCRIBE THE OVERALL MATURITY OF YOUR SOURCING PROCESSES?
Level 4: Established sourcing process applied to all addressable spend/categories; focus on business value 24%

Level 3: Established sourcing process applied to most spend/categories; focus on total cost of ownership

39%

Level 2: Developing sourcing process applied to some spend/categories; focus on price negotiation Level 1: Undeveloped no consistent sourcing process and limited spend/category coverage; focus on order processing 0% 5%

26%

12%

10% 15% 20% 25% 30% 35% 40% 45%

63% of survey participants feel that they are in the top two levels (3 & 4) of sourcing maturity with established processes. We found that there is a clear correlation between organisations with an annual procurement expenditure of under 200 million and those who ranked themselves with a lower maturity level 1 or 2 of sourcing process maturity. In other words, the smaller the organisation by procurement expenditure, the less mature it is in terms of sourcing process. In turn, we found that larger organisations were more likely to be mature. Level 3-4 (more mature) organisations use more of their eSourcing systems functionality such as contract development, authorisation and signature whilst those at a level 1-2 rarely use these additional functions.

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Figure 2: HOW LONG HAS ESOURCING BEEN USED IN YOUR ORGANISATION?


5 years + 3-5 years 1-3 years Less than 1 year 0% 5% 10% 15% 20% 21% 25% 30% 35% 40% 14% 28% 38%

eSourcing has been around since the late 1990s yet over 60% of organisations who responded have been using eSourcing for less than 5 years with 21% using eSourcing for less than a year, showing that eSourcing is still relatively new to many. Figure 3: MATURITY VS. TIME
40% 35% 30% 25% 20% 8% 15% 10% 11% 5% 0% 1% 1% Less than 1 year 6% 3% 1-3 years 3-5 years 5 years + 8% 10% 4% 14% Level 4: Established Level 3: Established 3% 19% 8% Level 2: Developing 1% 4% Level 1: Undeveloped

The graph above illustrates length of system use against the respondents maturity levels. It shows that those organisations that have been carrying out eSourcing for longer consider their maturity level to be more established.

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Figure 4: RESPONDENTS BY ORGANISATION'S ANNUAL PROCUREMENT EXPENDITURE


5 billion + 1-5 billion 500-1 billion 200-400 million 100-200 million Up to 100 million 0% 5% 10% 7% 12% 15% 20% 25% 30% 35% 14% 16% 22% 29%

The graph below shows that the maturity level of eSourcing within a department has a correlation with annual procurement expenditure. Most of those who stated that they put through 500 million to over 5 billion placed themselves in the level 3-4 Established category. The more recent adoption of eSourcing among smaller organisations is likely to be a reflection of the introduction of lower cost eSourcing solutions. Figure 5: MATURITY VS. EXPENDITURE
30% 1% 25% 4% 1% 3% 1% 1% 10% 4% 1% 5% 4% 5% 3% 0% 1% Up to 100 million 1% 100-200 million 9% 4% 4% 1% 200-400 million 500-1 billion 1-5 billion 5 billion + 7% Level 4: Established 9% 8% Level 3: Established 14% 11% Level 1: Undeveloped

20%

15%

Level 2: Developing

eSourcing maturity is influenced by both the time it has been used in an organisation and the amount of expenditure going through the procurement department. Other key influences are company culture, whether eSourcing is mandated, whether clear templates and processes are set in place, the level of ongoing training and support, push from the CPO and how well it is marketed and communicated internally.

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For eSourcing to work in an organisation and become part of the level 3-4 Established group you need to have clearly defined processes in place and many have established eSourcing through pilot projects. This may involve carrying out some eSourcing activities through a service provider first and using the successful examples to kick start the internal communications before investing in the full solution. That brings us into the next area which is what elements of eSourcing are being utilised the most.

Figure 6: WHICH OF THE FOLLOWING PROCESSES DOES YOUR ORGANISATION CURRENTLY CONDUCT USING AN ESOURCING SYSTEM?
74% 69% 63% 49% 26% 23% 19% 13% 10% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80%

eSourcing systems have an extensive suite of tools such as spend analysis, eRFX, evaluations, contract development, etc, but most systems are primarily used for eRFX and eAuction activities. About 50% of respondents used their systems for evaluation, but less than 25% used their systems for any type of contract related activity. A number of participants at the eSourcing forum said that they would like to use evaluation tools during eRFX and eAuctions more, but the main problem they found was systems that were unable to deal with both price and quality weightings easily and thus being too complex to use. This led to exporting data into excel to evaluate the eRFX and only using the evaluation function in the system for purely price focussed eRFX or eAuctions.
Best Practice Tip Smaller providers: If appropriate, using smaller software providers can be beneficial as they are often more innovative and flexible than the larger ones, particularly around bespoking things like reporting. You can help them evolve and develop their software and the benefit of this is that you get more of what you want because you have helped to create it.

In the Other answer option in Fig.6, Supplier Performance Management (SPM) enhancements were highlighted as a useful feature, but most eSourcing systems do not cover true SPM to the extent clients would like. This is an area where we feel there is still a long way to go and more specialist software is still the answer at present.

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There is a worrying consensus that eSourcing solutions are seemingly being used as and perceived as an auditable yet expensive email system. It is clear that whilst a transparent and auditable process is important particularly in the reduction of fraud, a lot of the potential value in the systems is not being harnessed and this is most likely due to the lack of focus on ongoing change management including training after the initial implementation. It was made clear that many organisations are paying for the full eSourcing solution yet only use a few elements of it. We would suggest that these organisations should only purchase a module at a time and grow eSourcing at a rate that ensures full and effective ongoing usage.
Best Practice Tip User forums: Large software providers will often only make a change to their tools if more than one organisation requests the change. Therefore the collective voice of user forums will help to influence future development and improvements to the software.

Looking at the numbers of eSourcing activities that are taking place strengthens the case for buying a service rather than a solution when starting on the eSourcing journey. Figure 7: APPROXIMATELY HOW MANY ERFX ACTIVITIES (EXCLUDING EAUCTIONS) HAVE BEEN CARRIED OUT IN THE PAST 12 MONTHS USING YOUR ESOURCING SYSTEM?
500+ 101-500 51-100 21-50 1-20 None 0% 5% 10% 15% 17% 20% 25% 10% 12% 22% 17% 21%

Almost 40% of respondents have carried out 20 or fewer eRFX activities in the past year. Of those who did 1-20 a year, the majority thought they were at a sourcing maturity level 2. As expected, those who carried out over 100 were in the more mature levels 3 & 4. Those organisations doing higher numbers of eRFX activities tend to be those who have used eSourcing tools for longer and have better processes in place. 38% had carried out over 100 eRFX activities in the past 12 months and 17% of these had carried out 500 or more. Of the 500+ group, while 8 said that eSourcing was mandatory for all sourcing requirements, for another 6 it was not, showing that significant usage can be achieved through good change management and training without having to rely on a mandate.
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Best Practice Tip Start with a service: If your organisation is starting its eSourcing journey then it is better to invest in eSourcing as a service than an entire solution. This will enable your organisation to focus on putting the right foundations in place in order to embed it in the business. If you have already invested in the solution then a service provider could still help to drive adoption.

Figure 8: APPROXIMATELY HOW MANY EAUCTIONS HAVE BEEN CONDUCTED IN THE PAST 12 MONTHS USING YOUR ESOURCING SYSTEM?
100+ 50-100 26-50 16-25 6-15 1-5 None 0% 5% 10% 15% 20% 25% 6% 11% 25% 28% 30% 5% 13% 13%

Over 50% of respondents had carried out fewer than 5 eAuctions over the past 12 months (28% doing none). A companys size significantly determines how far it has adopted eSourcing with most of the companies that are carrying out more than 100 eAuctions having an annual procurement expenditure of over 5 billion. Approximately 70% of respondents did less than 25 eAuctions over the last 12 months with 28% doing none at all. Given the significant savings attributable to eAuctions (Fig. 19) this is an area where eSourcing as a service for individual events or a programme would show significant returns. The challenge in running eAuctions comes from: The complexity of the tools that sit within the larger eSourcing systems Lack of specific eAuction management skills and experience Communicating to stakeholders that eAuctions can be flexible tools taking into account qualitative as well as quantitative criteria. Our experience of running auction programmes for major public and private organisations is that savings will invariably be many multiples of the management cost and a professional service builds confidence thus creating an appetite for more auctions. Successful eAuctions can be run for any requirement that can be clearly specified and for which there is a competitive market, whether direct or indirect. When run well our experience is that suppliers are happy to participate but become frustrated when the auction

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is only used for benchmarking purposes. A well developed eAuction plan should maximise competition while remaining tightly focused on your specific requirements. Key areas of focus when developing the plan will be: Developing the lotting strategy and pricing model Constructing bid conditions that promote fair competition Preparing supplier and stakeholder communication plans and communications Building and managing the eAuction Running supplier training Managing the live event and ensuring all relevant stakeholders are present and involved Post eAuction de-briefing including lessons learnt and publicising success

Figure 9: WHAT PROPORTION OF YOUR SOURCING REQUIREMENTS DURING THE PAST 12 MONTHS (ACROSS ALL CATEGORIES) HAVE BEEN PUT THROUGH ERFX AND EAUCTIONS?
100% 76-99% 51-75% 26-50% 1-25% None 0% 10% 20% 20% 2% 1% 5% 7% 12% eRFx 17% 26% eAuction 51% 9% 16%

28% 30% 40% 50% 60%

46% of respondents put less than 25% of the companys sourcing requirements through eRFX, with 79% of respondents putting less than 25% of requirements through eAuctions. Forum participants agreed that it was the amount of time and effort involved in setting up eRFX and eAuctions correctly that put users off most. Our experience shows that most individuals find that the first 3-5 eRFX activities can take a long time to set up but then they become faster as they get used to how the system works, what templates to use from past activities and how to use weightings. This highlights that perseverance and support to new users will pay significant dividends.
Best Practice Tip Training: It is essential to get new users trained on the eTools as early as possible rather than allowing them use offline tools initially, otherwise it becomes much harder to convert them at a later date. Ongoing training and support for all users is also key to sustaining eSourcing usage.

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eAuction set up time is more likely to depend on the type of auction you are carrying out and the different/number of variables used. Usually it is the more mature eSourcing departments that attempt the multi-variable auctions whilst less mature ones carry out more simple forms usually focused on price alone. Initial and ongoing training was an area highlighted at the forum as somewhere that more effort might be focused for most organisations. A more dynamic approach to increasing eSourcing in your organisation could be taken with training focussed on the mid-level user and an eSourcing service (internal or outsourced) provided to those who do low levels of activities. Those who are considered the super-users should become eSourcing champions and help to spread the good news about their activities. This approach has significantly increased usage for a number of organisations and improved the general perception of eSourcing, hence organisational commitment to it.
Best Practice Tip Segment the users: Segment your users (super-users, mid level users and rare users). By doing this you can prioritise your effort and training appropriately.

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Figure 10: WHICH OF THE FOLLOWING CATEGORIES HAS ESOURCING BEEN USED FOR DURING THE PAST 12 MONTHS?
29% 19% 19% 19% 12% 25% 19% 32% 15% 22% 12% 16% 16% 12% 12% 10% 0% 10% 18% 20% 30% 40% 50% 60% 70% 25% 31% 35% 40% 51% 50% 49% 47% 46% 46% 44% 44% eAuction eRFx 59% 66% 65%

IT related goods and services were the most common category to use eRFx (circa 65%); Direct Materials were the most common category for eAuctions (32%), yet we were surprised to find that there were very low level of activity in categories where requirements can easily be specified (such as office supplies and packaging). ITs involvement in setting up the eSourcing system in the first place explains for some participants why they have retained support in undertaking eSourcing activities.
Best Practice Tip eAuction pipeline: Planning the eAuction pipeline in advance will ensure that momentum is maintained beyond the initial wave of eAuction activity.

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Figure 11: ARE THERE ANY CATEGORIES THAT YOU FEEL ARE NOT APPROPRIATE TO ESOURCE OR EAUCTION? (If yes, please specify the category(ies) and the reason why:)
Yes Don't know No 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 22% 47% 50% 31%

Of the 30% who thought that there were categories not appropriate to eSource or eAuction, some of the following were listed: Commodities where the price is fixed on a market (sugar, petrol etc.) All categories above EU thresholds. Commodities that carry your companys brand can be best not to eSource as there is more evaluation required than simple price evaluation. Items such as IT Services where depth of knowledge and company strategy are more important than price. Services, consulting services, customised merchandise, self employed medical professionals eSourcing always makes sense but e-auctions do not always make sense for materials from design-make suppliers. eAuctions are in general not appropriate when having strategic relationships with suppliers for certain materials or in case of bottle-neck materials.

From the responses to this question, we see that peoples perceptions often override wider experiences of sourcing certain categories. We asked which categories were not appropriate for eSourcing and found that many of the ones listed were the same categories that came top for being used most with eRFX and eAuctions in the past 12 months (Fig. 10). For example, the most popular categories for eRFX and eAuctions were IT, professional services and marketing, yet both in the survey responses and from our experience, these have historically been categories many procurement functions have had problems breaking into. We believe that negative perceptions are having a big impact on eSourcing. In reality whilst eSourcing systems may add an extra layer to the sourcing process, they should not deliver a different result or require significantly different input from stakeholders, when compared to a professionally run traditional process. We would argue that eSourcing should be used positively to drive best practice and transparency, and not shied away from due to the perception that it both requires more effort and challenges our professionalism.

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WHICH CATEGORIES HAVE YOU FOUND TO BE THE MOST CHALLENGING TO ESOURCE AND EAUCTION AND WHY? Earlier we saw what categories were being eSourced and eAuctioned as well as which ones were not appropriate, but when asked if there were any categories that were challenging to eSource or eAuction we found some contradictions in views. Almost 50% of responses in this free text question mentioned that they had encountered challenges when eSourcing/eAuctioning in the services category yet we can see in Fig. 10 that services are among the more popular choices. 33% even said that services were not appropriate to eSource or eAuction. Survey comments included: Consulting and advisory services. They are the most difficult to develop and evaluate apples to apples qualifications. Marketing and professional services due to the many quantitative and qualitative factors that need to be assessed. There isn't a straight cost breakdown. Similarly we found that several had challenges with direct materials though no one mentioned that it was inappropriate to eSource or eAuction this category. It was difficult to eAuction direct materials due to the high relevance of quality requirements and supplier capability with very complex, varying specifications and demands. Some of the other comments made in the survey included: Complex goods and services. Due to their nature they are not easily sourced in a standard configuration and often we are forced to adapt the RFX to more appropriately suit the deliverables. Packaging and transport, because of the complexity of the price models and the post bid analysis needs High spec medical equipment as there are too many variations and subjective decisions to be made by a wide stakeholder group and medical consumables due to proliferated range of non-standard items being used; opportunities exists to standardise. Small-medium sized suppliers as they are less e-enabled and have difficulties with online tendering. It was noted during the forum that many of the categories most commonly put through eRFX and eAuction were also the categories frequently mentioned as not appropriate for eSourcing. Particular categories of note were professional services, marketing and direct materials. These differences suggest perception has a strong part to play and it is unsurprising that these are the same categories in which procurement have traditionally had challenges engaging their businesses. Overall we note that almost half of respondents didnt think that there were any categories that could not be eSourced or eAuctioned.
Best Practice Tip Stakeholders: Put the effort in to truly understand what your stakeholder requires in advance. This ensures that requirements are correct from the start and avoids difficulties specifying them within the tool.

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Figure 12: IN THE CASE OF EAUCTIONS, HOW OFTEN DO YOU END UP CONTRACTING WITH THE SUPPLIER THAT BIDS THE LOWEST PRICE?
Always Usually Sometimes Very rarely Never Not applicable 0% 5% 10% 15% 20% 25% 0% 28% 30% 35% 40% 45% 3% 21% 10% 39%

Whilst most respondents will usually choose the supplier who bids the lowest price, 3% very rarely do and only 10% always do. Should we be questioning what sort of messages this sends out to the suppliers participating, how it influence their bidding strategy during an eAuction and their participation in future events?

Figure 13: WHAT TYPE OF EAUCTIONS DO YOU MOST OFTEN USE?


Ranking Auctions: Suppliers only see their rank and no prices. Best price Auction: The lowest price is visible to all suppliers. Weighted Auctions: Criteria other than price are factored into ranking. Other 0% 9% 19% 44%

29% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

The majority of our respondents used ranking auctions whereby suppliers only see their rank without seeing any other prices. Some were using best price auctions but the number of auctions that they had carried out over the past 12 months only ranged from none to 15, so relatively low.
Best Practice Tip eAuction types: We would usually recommend weighted ranking auctions. The weighting enables all suppliers to see their rank and ensures that the best ranked supplier is almost always awarded the business. Ranking prevents bidders seeing others prices but will usually provide you with a good view of each bidders best price.

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Some of those who selected other mentioned that they used a combination of ranked and weighted, traffic light or a range of all of the options. The forum discussed the potential ethical challenges around best price auctions showing competitors pricing and the challenge of silent bidders who only participate to see other bidders pricing. The consensus view was that best price auctions should be used with care and that generally ranking auctions would achieve best results and greater insight into the market, through observing all bidders best bids. This is a popular topic and will be discussed at future forums.

Figure 14: WHAT IS THE STATUS OF ESOURCING WITHIN YOUR ORGANISATION?


Mandatory for all requirements Mandatory for certain categories Mandatory for certain spend levels Optional Other (please specify) 0% 5% 10% 15% 16% 20% 25% 30% 35% 40% 45% 50% 11% 12% 45% 17%

We were interested to find out how far organisations had mandated eSourcing in their organisation. Unsurprisingly, it was optional for the majority of respondents but for 40% eSourcing had been mandated to some degree. Of the 17% who had mandated eSourcing for all requirements, 16% were at a level 3 & 4 maturity and had carried out high volumes of eRFX and eAuctions over the past 12 months.

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Figure 15: MATURITY VS. MANDATORY STATUS


50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1% 8% 9% 8% 1% 5% 6% 13% 1% 5% Level 4: Established 18% Level 1: Undeveloped Level 2: Developing Level 3: Established 8%

Best Practice Tip Mandatory eSourcing approach: Some organisations are aiding the adoption of eSourcing by making everything go through eSourcing or eAuctions where approval needs to be obtained for activities to be carried out manually. This approach makes it more difficult to use the traditional methods and faster to use the eTools.

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Figure 16: HOW DO YOU EXPECT YOUR ORGANISATIONS USE OF ESOURCING TO CHANGE OVER THE NEXT 12 MONTHS?
Decline significantly Decline slightly No change Increase slightly Increase significantly 0% 5% 10% 15% 20% 25% 30% 35% 1% 21% 39% 39% 40% 45%

As expected, and considering the relatively low general level of eSourcing usage, 78% felt that eSourcing would increase over the next 12 months. The one survey participant who stated that they expected it to decline slightly was part of an organisation already carrying out very high levels of eRFX and eAuctions.

Figure 17: WHAT HAVE BEEN THE EXPECTED AND ACTUAL BENEFITS OF USING ESOURCING (EXCLUDING EAUCTIONS) IN YOUR ORGANISATION? Expected benefit 50 50 46 44 37 34 30 Actual benefit 42 34 44 26 26 28 19 % Difference 16% 32% 4% 41% 30% 18% 37%

Answer Options Improve transparency and the audit trail Speed up sourcing projects Enhance/standardise the process Reduces the evaluation period More effective analysis Increase cost savings Easier to manage international events

*The 4 benefits with the highest discrepancies are highlighted in red. The reduction in the evaluation period was the biggest disappointment for our respondents as well as the expectation that sourcing projects would be sped up. It was agreed at the forum that a lot of time needed to be invested in the tool to really show the benefit of the evaluation capability; time that most people didnt have or want to use. Much of this up front effort was around building templates and standardising your own processes in order to make each eSourcing activity faster and more automated.
Best Practice Tip Templates: Invest upfront to create best practice templates that can be used in the eSourcing tools quickly and easily. These should be flexible and guidance should be provided. This will significantly reduce lead times and with it user antipathy. A library or procurement wiki keeping historic documents for re-use is also a useful feature.

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Both 'Increase in cost savings' and 'enhance/standardise the process' had a lower discrepancy between expected and actual benefit. Overall 'enhance/standardise the process' and improve transparency and the audit trail were the top actual benefits. This highlights the risk management benefits of the tool which should be key selling points to legal and finance.

Figure 18: WHAT HAVE BEEN THE EXPECTED AND ACTUAL BENEFITS OF USING EAUCTIONS IN YOUR ORGANISATION? Expected benefit 45 34 32 26 26 22 13 Actual benefit 44 29 28 21 20 17 13 % Difference 2% 15% 13% 19% 23% 23% 0%

Answer Options Increase cost savings Speed up sourcing projects Improve transparency and the audit trail Enhance/standardise the process Reduces the evaluation period More effective analysis Easier to manage international events

*The 3 benefits with the highest discrepancies are highlighted in red. When looking at the expected versus actual benefits from eAuctions we found that more participants expected the evaluation period to be reduced by using eAuctions but fewer agreed this was actually the case. Considering that not all organisations contract with the lowest bid it is unsurprising that the evaluation time is longer. If you are able to accept the lowest bid, post auction evaluation should be relatively limited. However, this requires time to be spent on developing correct weightings in advance. There was a common consensus at the forum that eAuctions were, on a very regular basis, able to increase cost savings and this was reflected in the survey results. It received high numbers of votes for both expected and actual benefits with very little difference between the two.
Best Practice Tip Silent bidders: Often suppliers will join an eAuction simply to see what the market price is for the goods or services they are auctioning when they know it is an Auction in which prices will be shown. If you notice that they are not participating and suspect it is for this reason then they should be challenged to participate and if appropriate, blocked out of the Auction even if it has not finished.

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Figure 19: ON AVERAGE WHAT LEVEL OF SAVINGS HAS YOUR ORGANISATION TYPICALLY ACHIEVED THROUGH EAUCTIONS?
30%+ 20-30% 10-20% 5-10% 0-5% Not applicable Dont know 0% 5% 10% 11% 15% 20% 25% 30% 35% 40% 8% 21% 19% 1% 4% 36%

Over 40% of respondents believe they save in excess of 10% on average from eAuctions. While forum participants strongly agreed with these findings, the interesting question of auction psychology was discussed: Whether or not to tell suppliers in advance of issuing an RFP that you are going to go to auction What price level to start the auction at How to optimise extensions to drive best price within a reasonable timescale and a number of other questions. eAuction psychology and how best to set them up for success is likely to be a popular forum topic and an area where State of Flux has extensive experience.

Figure 20: IN YOUR ORGANISATION, HOW DO THE BENEFITS DELIVERED BY ESOURCING COMPARE WITH THE COSTS OF THE SOFTWARE/SERVICE?
Costs far exceed benefits Costs exceed benefits Benefits and costs are equal Benefits exceed costs Benefits far exceed costs Dont know 0% 5% 10% 15% 20% 25% 1% 29% 32% 30% 30% 35% 8%

There was a very positive view on the overall costs of the software/service versus the benefits achieved yet a small proportion, 8%, said the costs in fact exceeded the benefits. These results were surprising considering the often high prices for the software/services and the seemingly limited use within the organisations.

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Best Practice Tip Internal marketing: Creating a good news update at regular intervals about eSourcing activities is a way to improve the perception of your eSourcing tool. Often people get excited when you talk about large savings that are achieved. Some organisations encourage stakeholders to sit in and observe eAuctions so that they can understand how it works and participate in the excitement.

Figure 21: HOW WOULD YOU DESCRIBE THE GENERAL PERCEPTION OF ESOURCING WITHIN YOUR SOURCING DEPARTMENT?
Very positive Positive Indifferent Negative Very negative 0% 10% 20% 30% 40% 50% 13% 31% 16% 41%

Again the perception of eSourcing was positive with over 50% being positive or very positive. It is interesting why the use of eSourcing tools in organisations is not higher if there seems to be such a positive view of it. There was a large proportion of indifference to the tools but only 13% of respondent organisations had a negative perception of eSourcing. Negative perceptions will ultimately have an influence on the numbers of eSourcing users, the amount of buy-in and the ease of carrying out change management in the team. One of the key themes arising from forum participants was that positive internal marketing of the eSourcing software was very important and had to be carried out on a continuous basis if eSourcing was to be viewed positively and become part of their teams day to day life.
Best Practice Tip Stakeholder buy-in: Include stakeholders in scoring the eRFX responses with you. This will help them to understand the process and ensure that they know how important good quality requirements are for the evaluation phase. They also have to own the long-term outputs from the sourcing exercise.

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Figure 22: WHAT BARRIERS, IF ANY, ARE THERE TO USING ERFX AND EAUCTIONS MORE WIDELY WITHIN YOUR ORGANISATION?

No barriers eSourcing tactics need to be developed in line with the sourcing strategy Perception that it is only and always price driven Suppliers are reluctant/ refuse to participate eSourcing activities take a long time to prepare Less flexibility around drafting all encompassing questions

14% 7% 29% 22% 31% 68% 22% 47% 50% 21% 31% 18% 32% 43% 42% 46% 24% 11% 3% 8% 0% 20% 40% 60% 80% eRFx eAuctions

Impersonal way of doing business

Inability to specify requirements precisely enough

Not seen to deliver benefits

Other

The main barrier to eRFx is the time it takes to prepare activities and the main barrier to using eAuctions more widely was the perception that they were always price driven.
Best Practice Tip Ready made approaches: Capturing past eSourcing activities and storing them, so that they can be reused by others, will save time and effort and eSourcing activities can build upon past activities thus allowing improvements to be made.

The issue of time concerns came up at the forum and it was generally felt that these were significantly reduced if robust templates were in place and if staff were trained. Again this led to discussions around having smaller dedicated teams. Also some felt that eSourcing tools were not always used flexibly and undertaking a lite process for lower value/criticality requirements.
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Those who provided us with a free text response under other referred to some of the following as barriers: The biggest barriers to eSourcing are the internal policies and procedures governing it. Without these internal policies and procedures then you cannot make the next step to using eSourcing. We used eSourcing quite extensively 3-5 years ago. We had dedicated team when we were centralised. Once teams were de-centralised, ability to run eSourcing activity became and is more limited. We typically now have major contracts across key spend areas e.g. outsourced IT contract. Others mentioned the following: Fear of being too pushy towards suppliers Auctions do not conform to EU regulation Fear of using new technology/ignorance For some suppliers it is losing the personal way of tendering / negotiating Cost of the system With a new department it takes time to get buy-in for such systems Lack of a mandate from management Missing proper spend visibility to develop a complete strategic sourcing roadmap A misconception that eAuctioning some categories is inappropriate
Best Practice Tip Scoring: Evaluation weightings should be determined in detail before supplier responses are received. Weightings should only be amended post-response through a structured process. This will help to retain objectivity and ensure lessons are learnt for next time.

As expected it was the subject of barriers to eSourcing and the problems that were being encountered that generated the most debate throughout the forum. The following are some of the comments: Losing the human element of sourcing was a concern for those at the forum as with 32% (eRFX) and 43% (eAuction) of respondents to the survey. It was noted that carrying out negotiations on the tool was thought to be impersonal. Because events are run through a tool, it should not stop direct (phone or face to face) contact with suppliers. It is important to ensure that they understand and are comfortable with both the requirement and the functioning of the tool, to ensure their best responses. A lot of effort is required to set up eRFX without really being sure of what the true benefits were in comparison to the manual methods. This should be addressed through developing a clear benefits case for the team and stakeholders to understand the benefits to the organisation, by developing templates and providing training to reduce set up time as far as possible. eSourcing tools are not being used to their full potential and more often than not used as a glorified email account. Is this a bad thing?

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This is a bad thing if you are paying for the full suite. We would encourage organisations to build momentum through a limited range of activities and expand out as demand increases. Evaluation scoring online is problematic for a variety of reasons: o It is faster to use a spreadsheet o Procurement professionals dont want to let the IT supporting teams see the scores so submissions need to be scored offline in order to keep it fair and protect confidentiality. o It is easier for stakeholders to do the scoring offline rather than having to train them.

A number of tools are not as user friendly for evaluation as they should be. However, in a number of cases it is inexperience with the tool that makes scoring off line easier. Training and a positive communications campaign is key to overcoming this hurdle. Conducting negotiations online is impersonal and it is important to have that personal interaction when dealing with strategic suppliers. Using the tool does not mean that you do not meet or talk to suppliers and we believe this is still key to delivering a sustainable outcome. The tool should be used to record the progress of negotiations, particularly for terms and conditions and will provide a useful audit trail, but the relationship between the two parties is equally important.

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CONCLUSIONS
Of those who participated in the eSourcing survey we found that 62 % had been using eSourcing tools for less than 5 years and over 70% did not use any contracting functionality. This confirmed our suspicions that although these systems have been around for 15 years or so they are still far from core to the average users sourcing process. Most survey respondents believed that the benefits of eSourcing outweighed or far outweighed the costs, although the limited usage of these systems in terms of volume of sourcing activities and range of activities being performed leads us to question this finding given the relative cost of many of the larger systems. Where eSourcing is being used there are significant benefits including: Improved transparency and audit trail More standardised processes Increased savings (particularly significant for eAuctions) Most organisations are using eSourcing for less than half of their sourcing requirements and 75% do not use any contracting functionality. Key challenges which reduce usage are: The complexity and lack of flexibility of many tools, adding time and effort to the process particularly around eRFX and eAuction set up and evaluation. Tools not designed by procurement people creating less intuitive user interfaces. A lack of resource and commitment put into change management. The money and effort spent acquiring the tool is usually far greater than the investment put into communication, training and set-up, to enable users to utilise the tool efficiently and effectively. This is the area most within Procurements power to address. Significant savings and broader benefits are being achieved by leaders in the field. However, for many the lack of focus and investment on embedding eSourcing is wasting the significant investment in the tool and creating an administrative burden rather than providing a facilitator of best practice procurement. The reality of eSourcing, as opposed to the technology, has not progressed as far as might have been expected over the last 15 years. We would argue that to a significant extent this is a reflection of the broader progress of procurement in general. While there are pockets of excellence, many functions are still working to become an integral part of business decisions and be seen to deliver value beyond savings. With greater focus for many organisations around risk and control this is one area where eSourcing can raise procurements profile. We recommend a measured approach to implementing eSourcing with realistic, incremental goals. While a cost effective approach, we believe it also has more chance of success, which is critical for the organisations that are now on their second or third launch of eSourcing and cannot afford to get it wrong again. How we can help: State of Flux has experience in helping its clients design and implement change programmes from streamlining processes to delivering training and communication plans. To discuss any of the points in this report please call Dominic Hastings on: +44 (0)207 842 0600. You also welcome to join the State of Flux eSourcing Practitioners online forum on LinkedIn.

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APPENDIX: ABOUT THE RESPONDENTS


Figure i: RESPONDENTS BY SIZE OF OVERALL PROCUREMENT TEAM
101+ 51-100 31-50 21-30 11-20 1-10 0% 5% 10% 15% 8% 11% 19% 20% 25% 30% 35% 15% 15% 33%

The size of respondents procurement teams varied significantly and one third had procurement teams of over 100 and about a third had less than 20 in the team.

Figure ii: RESPONDENTS BY PROPORTION OF ESOURCING USERS WITHIN THE ORGANISATION


101+ 51-100 31-50 11-20 1-10 0% 5% 10% 15% 20% 25% 30% 11% 35% 35% 40% 15% 14% 25%

Numbers of users varied but over a third only had between 1-10 users.

Figure iii: RESPONDENTS BY REGION


Africa Latin America Asia North America Australasia Europe 0% 10% 20% 30% 40% 50% 60% 1% 3% 4% 12% 13% 67% 70% 80%

Two-thirds of respondents were from Europe. No particular industry dominated the respondent group (though most derived from financial services (9%) see appendix).

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Figure iv: Respondents by number of eSourcing users


101+ 51-100 31-50 11-20 1-10 0% 5% 10% 15% 20% 25% 30% 11% 35% 35% 40% 15% 14% 25%

A large proportion of respondents had a very small number of eSourcing users (between 1-10) whilst 25% had over 101.

Figure v: Respondents by industry sector


Travel & leisure Mining Media & entertainment Construction Automotive Paper & packaging Chemicals Aerospace & defence Professional services Oil & gas FMCG/CPG Engineering Retail Healthcare Utilities Transportation Pharmaceuticals IT/high tech Public sector Manufacturing Food & beverages Telecommunications Financial services Other (please specify) 0% 2% 4% 6% 8% 10% 12% 14%

Respondents came from a range of industries with slightly more coming from the financial services sector.

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Figure vi: Respondents by their role in relation to eSourcing


Regular user eSourcing programme owner/sponsor eSourcing programme manager Occasional user Other 0% 5% 10% 15% 20% 13% 20% 21% 23% 23% 25%

There was a fairly even spread of roles within our survey respondents.

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HOW CAN STATE OF FLUX HELP?


State of Flux is a leading procurement and supply chain consultancy, and strategic business partner to multinational companies and major public-sector organisations. Headquartered in London, State of Flux works closely with its clients to help upgrade their procurement and supply chain capabilities, drive best practice and deliver superior business performance. We provide a comprehensive set of consulting and delivery services, job-focused training programmes, and specialist services covering contract management, eSourcing, market intelligence, supply chain risk and supplier relationship management. In addition, we offer a unique web-hosted supplier relationship management system that enables better collaboration with your most important business partners.

Consulting State of Flux offers a comprehensive set of consulting and delivery services, ranging from spend and capability reviews through to the design and implementation of strategic sourcing and supplier management programmes. We also conduct end-to-end sourcing projects and manage selected spend categories on our clients behalf, freeing up their people to concentrate on strategic initiatives. Our core consulting services cover strategy, process, people, and technology. Sourcing Whether you need help in designing, implementing and managing a full sourcing programme, new processes or just want ad-hoc support for a specific project, our experienced sourcing team can provide a flexible solution that suits your specific requirements and budget. Our sourcing support falls under three broad headings: Sourcing delivery o In sectors from financial services to care homes we have provided support across all categories to rationalise the supply base, reduce costs and contract with suppliers who are appropriate for each organization. o For oil and gas and utilities clients we have supported major sourcing projects, running tenders, negotiations and developing operating models for IT and professional services panels in some cases with values over 100m. o In the public and private/utilities sectors we have managed eAuction programmes for clients, advising on appropriate lotting strategies, training suppliers, managing the auction and supporting the final evaluation and award phases. Sourcing process improvement
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Process review, design and implementation, including support in embedding the processes when required o For oil & gas and manufacturing clients, we have built new processes to ensure that internal customer requests are dealt with efficiently, focussing on optimising procurement resource and customer service. Full sourcing programme support o Supporting clients in taking their procurement to the next level, from spend & capability reviews to supplying the resources to deliver the agreed to be state.

Contract Management State of Fluxs combination of legal, systems integration and procurement expertise means we are ideally placed to help you achieve excellence in contract management and ensure that contracts are managed in a way that is consistent, visible and compliant with regulatory requirements across the organisation. Our comprehensive range of contract management services spans three stages: Diagnosing current practice: o Analyse the extent to which expenditure is based on active, written and easily accessible contracts o Compare the accuracy and completeness of contract information stored in a database o Assess software options and provide unbiased advice Implementing change: o Draft clear policies on the usage, type and storing of contracts o Define and document processes and configure the system o Devise a business-wide communications strategy to explain the new approach o Provide staff training and user guides o Load active contracts into the system and cleansing data Providing ongoing support: o Audits to ensure compliance with policies and processes o Implementing software upgrades o Provide of interim personnel (e.g., system administrator) Supplier Management State of Flux has worked closely on supplier relationship management (SRM) programmes with a number of pioneering companies. Whether you require assistance in designing a new programme or tailored support for an existing one, our experienced consultants can help. State of Fluxs Supplier Relationship Management System (SRMS) is a unique web-based and hosted platform that complements, and works in harmony with, your other software applications. It ensures that both internal and supplier personnel share a common view of the business relationship and provides tools that enable them to collaborate more effectively. The SRMS includes modules for risk management, contracts management and performance management.

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Research / Market Intelligence Using experienced researchers and consultants, State of Flux provide high-quality data, information and analysis to support your sourcing team. Whether you need insights on the latest market trends, in-depth category reports or impartial feedback from key internal or external stakeholders, we deliver bespoke and actionable intelligence to help you make the right decisions. Projects range from supply chain risk reviews for major insurers to Voice of the Supplier surveys for Global FMCG companies. Supply Chain Risk Management State of Flux sees good risk management as an integral part of good sourcing and supplier management. Our emphasis is on helping our clients to identify and implement tangible steps to manage supply risk more effectively. A consultancy engagement typically begins with a cross-functional workshop focused on a specific risk area, category or supply chain. The aim of this is to get a group of managers, including those in customerfacing roles, talking about existing capabilities to deal with supply risk and how these might be improved. From a pilot like this, better risk management of a particular supply chain will be achieved, as well as identifying and developing risk management processes that can be rolled out more widely. Training State of Flux offers flexible training and development solutions aimed at both procurement professionals and sales and other business professionals who need to understand how procurement operates. Training programmes include category management, commercial awareness, contracts management, eSourcing, strategic sourcing, supplier management, negotiation and risk management.

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KEY CONTACTS
For more information, please contact:

Dominic Hastings
Executive Consultant, State of Flux Limited Email: dominic.hastings@stateofflux.co.uk

Emily Richardson
Consultant, State of Flux Limited Email: emily.richardson@stateofflux.co.uk

State of Flux Limited (Head Office)


222-225 Strand London WC2R 1BA Tel: +44 (0)207 842 0600 www.stateofflux.co.uk eSourcing Practitioners Group (LinkedIn forum) State of Flux SRM Microsite

Information Disclaimer 2012 State of Flux. The information contained within this report is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the participants and do not necessarily represent the views and opinions of State of Flux Limited. Publication date: August 2012 Publication name: State of Flux eSourcing Report 2012

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