Recent Yankee Group research reveals that companies have shifted IT dollars from core or internally oriented technologies to edge-of-the-enterprise technologies. In fact, 71 percent of the companies we surveyed increased investment in edge-of-the-enterprise technologies in 2003. During this period, the portion of the budget allocated for these technologies grew by 75 percent on average, while the overall IT budget grew only 3.7 percent (see Exhibit 1). Sourcing solutions are high on the list of technologies being deployed at the edge of the enterprise.
During the 1990s, companies invested in internally focused finance, human resources and materials management solutions. Today, companies are investing in customer-facing and supplier-facing solutions at the edge of the enterprise to better serve customers and improve supply flow. Well-engineered sourcing technology from vendors such as Ariba, FreeMarkets, SupplyWorks and Emptoris provide significant supply-flow benefits by delivering spend visibility and automating sourcing activities. Enterprise resource planning (ERP) vendors including SAP, Oracle and PeopleSoft, which are known for internally focused ERP software, also offer sourcing solutions.
Few enterprises were technically or organizationally prepared to embrace sourcing technology during the height of dot-com mania. Similarly, established ERP vendors could not offer financially viable edge-of-the-enterprise solutions. Client/server ERP and supply-chain management (SCM) applications made it too technically challenging and financially unacceptable to extend processes and functions to the edge of the enterprise.
Much has changed. The costs of integrating internal applications and coordinating partner activities are declining. Various protocols and standards reduce the cost of integration and customization. Vendors have responded to customer demands and are making it easier for purchasing teams and suppliers to access purchasing data, inventory levels, order status, and forecast information, making it possible for them to act on this spend visibility.
Trend Impact
Before a company can control spending, it must first determine how much it is spending. With the help of spreadsheets, business intelligence tools, ERP systems, consultants, purchasing applications, or a combination of tools, companies must gather and analyze purchasing information to understand what they buy and how they buy. As shown in Exhibit 1, these spend-visibility exercises help companies make sense of confusing data and processes so they can take advantage of savings opportunities at the edge of the enterprise.
Market-leading purchasing organizations indicate sourcing applications that offer spend visibility enable purchasing professionals to reduce total spending by an average of 4 to 8 percent.
The Yankee Group interviewed one market-leading discrete manufacturer whose material costs skyrocketed when it moved from a make-to-stock to a make-to-order model. In response to unacceptable inventory expenses, the company launched a manual spend-visibility project.
The project had two objectives: First, the company wanted to gather and rationalize spend information across three geographic locations. Second, the firm intended to map its manual purchasing process to identify workflow cost-saving opportunities. With the help of expensive external consultants, the manufacturer successfully mapped its procurement process and rationalized spending for its top commodity category.
The manufacturer had a 12-step manual procurement process that used output from three versions of the same ERP system on material requirements, and inventory systems on current inventory levels. It had to manually rationalize requisition data, which it then needed to cleanse because different ERP instances produced inconsistent item and vendor files (a lamp was called a 'lamp' in one ERP instance, and a 'light' in another).
Next, the company had to extract historical information from its accounts payable system about the price it paid for a given item in previous orders. Then, it had to call to determine the supplier's availability and generate a purchase order, which the company then printed and faxed.
The manufacturer set a goal of automating 25 percent of its purchase transactions and implemented a spend-visibility and procurement solution.
Many organizations are investing in sourcing applications at the edge of the enterprise for similar performance improvements.
Vendor Recommendations
Sourcing specialists such as Ariba, i2, Manugistics, and SupplyWorks should target organizations with complex back-office systems and expensive-to-integrate ERP systems that are frustrating the companies' spend-management efforts. These vendors must provide undeniable proof they can deliver edge-of-the-enterprise applications with acceptable total cost of ownership (TCO) implications. Many vendors can deliver cost-effective technology at the edge of the enterprise. Quantifying TCO advantages will help line-of-business decisions-makers win approval for sourcing projects. SAP must continue to improve the flexibility of its suites to deliver cost-effective edge solutions. NetWeaver is SAP's response to the unacceptably high integration and customization costs associated with its products. SAP's SRM and NetWeaver initiatives were both a response to SAPMarket's failed e-marketplace initiative. For SRM to succeed, SAP must prove the TCO advantages that the NetWeaver stack can deliver to companies using heterogeneous environments that are considering sourcing solutions. Invest in spend-visibility tools and sourcing applications to reduce the cost of obtaining and acting on spend intelligence. Enterprises best positioned to benefit from this sourcing approach include:
- Organizations running multiple back-office systems that spend more than $500 million annually - these companies will reap significant benefits from integrated spend-intelligence solutions
- Organizations that have invested in other spend-visibility approaches, and want to make the process repeatable and more cost-effective
- Organizations that have invested in sourcing and procurement applications and want to leverage integrated spend intelligence to improve system return on investment (ROI)
Enterprise Recommendations
Develop a spend data rationalization strategy as part of any sourcing or procurement technology project. Data quality and buy-side technology ROI are intrinsically linked. ROI will be considerably higher if the data that drives sourcing and purchasing decisions is captured, cleansed and rationalized cost-effectively. One option is to clean the back-office mess, but most companies are unwilling or unable to rationalize the item, customer and vendor masters across multiple ERP instances or across disparate systems. A second, more realistic, option is to leverage a sourcing application vendor's information-capture, cleansing, and rationalization technology. Ariba, FreeMarkets, Manugistics, SupplyWorks and i2 offer data rationalization capabilities as part of their solutions. Don't take the TCO advantages of an integrated ERP suite for granted when considering an edge-of-the-enterprise sourcing investment. Effective sourcing solutions usually span multiple back-office systems and require customization to align software with company-specific purchasing processes. These two needs erode the TCO of integrated suites. Conduct a rigorous TCO assessment to compare incumbent ERP vendor TCO with the costs associated with sourcing specialist product offerings.
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