Quantifying Savings from eProcurement – Part 1 – The Macro View

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This document is part of a series of white papers addressing the challenge of quantifying savings from the implementation of electronic procurement systems. The series consists of

  • Part 1 – The Macro View
  • Part 2 – Vendor Management
  • Part 3 – Process Controls

 

Quantifying Savings from eProcurement – Part 1 – The Macro View

The implementation of purchasing systems can be justified with industry benchmarks that demonstrate the benefits of e-procurement at a macro level.  The Aberdeen group cites results  of e-procurement initiatives in terms of processing cost, cycle time, spend under management, and reduction of maverick spend.

Performance Area Before After Improvement
Requisition-to-order costs $51 $26 49%
Requisition-to-order cycle time 9.6 days 3.4 days 65%
Spend under management 42% 60% 43%
Percentage of maverick (off contract) spend 33% 20% 39%

Source: Aberdeen Group

The above savings are based on average performance improvements reported by enterprises as a result of the implementation of e-procurement solutions. Companies interested in e-procurement may build a cost justification with macro data from a reputable research organization such as Aberdeen. For example, project an ROI based on a cost saving of $25 per requisition, or estimate a 49% savings in processing cost.

Example:

System Investment Annual Operating Cost Cost Savings per Requisition Annual  Purchases Annual Savings Net Annual Savings Internal Rate of Return
$35,000a $10,000 b $25 1200 $30,000 $20,000 49%
  1. Investment includes software, servers, and implementation services
  2. Software maintenance, server operating cost, internal IT support

However, research surveys combine tangible and intangible results. The benefits of a solution may be critical to the success of an enterprise, but difficult to quantify for a specific client. Examples are

  • Labor savings only add to the bottom line if the work force is downsized, or redeployed to tasks that produce revenue or quantifiable cash savings. In the mid-market, this is often not the case because labor savings are not sufficient to reduce staffing levels.
  • Documentation of expenditures prevent tax and audit problems. Important but difficult to measure.
  • Spend management actions such as disapproved requisitions, travel requests, and purchases generate increased profits only when net spending is cut.
  • The frequently cited reason for the implementation of a procurement system, lack of visibility or delays in approvals only raise spending if the resulting corrections (such as emergency orders or late travel bookings) actually increase the cost of the eventual purchase. But again this may also be difficult to prove.

Many purchase automation solutions focused on simple purchase automation and invoice automation address perceived pain points of a slow and paper intensive process, but lack the functionality generate quantifiable savings.

Part 2 - Vendor Management is focused on quantifiable spend control and measurable cost savings examples resulting from specific actions that are supported or enabled by a purchasing solution.

by Paramount Technologies

 

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