To maintain profit margins, European firms stampede into online sourcing. But firms fail to achieve hoped-for cost savings due to fudged price comparisons and weak purchasing compliance, according to a new brief by Forrester Research (Nasdaq: FORR). Firms will focus on multicriteria value creation, not on one-off price cuts.
“In today’s tough economic climate, European execs seek to enhance cost control with eSourcing technologies like auctions, tenders, and requests for quote,” said Forrester Senior Analyst David Metcalfe. “Vendors of all stripes use claims of 10 percent average cost savings to drive demand for online sourcing technologies and wraparound consulting. But average price reductions defined in contracts don’t add up. Indeed, Forrester believes online sourcing offers firms the prospect of year-on-year average cost savings of less than 5%, not the 10% vendors claim.”
To calculate cost savings from eSourcing, firms must deduct license fees and consulting charges — additional fees that they didn’t face before. Also, vendors sell their sourcing platforms by the module, but many clients don’t have the contract management functionality needed to enforce changes in purchasing behavior — and some vendors lack contract management functionality entirely. For instance, plant managers distributed across the world continue to buy from regional suppliers, short-circuiting eSourced corporate deals. Firms took two years to discover that eProcurement requires process change to capture technology efficiencies; the redesign of the sourcing process adds additional change costs.
Forrester believes that as executives discover the true drivers of cost savings, they will shift their eSourcing focus from short-term price reductions to sustainable value creation on multiple criteria like product quality and delivery timeliness. To maximize value creation, firms should drive compliance with accounts payable integration and enhance requirements gathering with shopfloor integration.
“Purchasing directors will soon realize that price reductions from eSourcing don’t equate to cash rebates in the bank,” Metcalfe added. “To ensure that geographically dispersed plant managers comply with deals negotiated online, firms will integrate their accounts payable ERP module with their sourcing apps contract management module. To test the eSourcing waters, European firms like BAE Systems use auctions. But auctions represent a single link in the sourcing process, ignoring painful requirements gathering for complex products. To capture greater efficiencies and reduce cycle times, firms will encourage design app vendors like MatrixOne and PTC to move into sourcing.”