eSourcing 2.0: Making the Case

Now that I’ve made it home, I’m going to spend the next few Fridays drilling down into the concept of eSourcing 2.0 which was introduced on the site earlier this year. For more than a decade, strategic sourcing consultants, professionals, and solution providers have been working with enterprises to drive greater spend volumes onto their eSourcing platforms. Despite the voluminous amounts of research, case studies, and anecdotes developed by the entire industry, in the typical year, most enterprises fail to use eSourcing for more than 25% of their addressable spend in a year (To be fair, 2009 was not a typical year and sourcing volumes soared. I hope this momentum continues. We’ll see.). I’ll start here again with my definition of eSourcing 2.0.

eSourcing 2.0: Every negotiation that results in an executed contract should use an eSourcing solution.

Now, I spend a good deal of time thinking about supply management concepts and strategies and how to present them. I’ve struggled for about a year (on and off, not daily) trying to simplify the eSourcing 2.0 code/policy/argument. While I think it has been improved, I’m not sure it’s done. To that end, please, please chime in with your ideas and suggestions.

The concept of eSourcing 2.0 has an exact parallel in the downstream procurement process: “No PO, No Pay,” which is crisp, succinct, and universally understood by procurement and AP pros, but also by those in the line of business – “if there is no purchase order (‘No PO’), we will not pay an invoice (‘No Pay’)” – you have been fairly warned, you have been clearly warned. The policy is hugely effective in guiding the desired behaviors of the entire enterprise. It creates a sense of control and constraint. And when an eProcurement system is in place and used to generate the purchase orders, it helps procurement gain enterprise-level visibility into spend, all spend (it also helps if there is no eProcurement system). And it provides flexibility to allow POs to be created after the fact with loose categorizations to buckets like ‘services’ or even ‘other’ that converts traditional ‘non-PO spend’ into PO spend (call this the workaround). By establishing this rule of order and pairing it with an easy workaround, enterprises are able to get to 70% to 80% PO spend reasonably quickly (depending on where you start, this can be a few years) but with the workaround, visibility into the non-PO spend is enabled and the procurement team can start working to first understand the spend, then develop a strategy to better manage and procure it. Many teams now report 95%-99% PO spend. Google is one such team.

eSourcing 2.0 follows the exact same logic – “If you do not use eSourcing (to capture the negotiation), there can be no contract” or “eSourcing usage must precede a supplier contract.” I believe this policy offers many of the same benefits as the “No PO No Pay” policy, and many other benefits.

Is there value in understanding why your current suppliers are your current suppliers? Would it be helpful for global organizations to understand how (and why) certain regions or business units define their requirements and what process they use to award contracts for different categories? The mere shift in employment trends that now have one in four workers with less than one year of employment tenure and one in two workers with less than five years of tenure should make knowledge capture and retention an important issue for all enterprises. In this environment, doesn’t it make sense to use a system to capture category and supply base knowledge so you don’t have to rebuild it or pay a third-party for it in the future?

The simple justification for eSourcing 2.0 is that there should be an enterprise-level system of record that captures the key elements of the discussion with suppliers that result in the final (or agreed upon) business requirements and associated terms.

This justification is one of compliance, one of visibility, one of knowledge capture and the development of best practices. Who would argue against these points? And, why?

To accomplish this, all that is needed is an enterprise-level system that provides easy access and enables the sourcing/procurement teams and potential suppliers to collaborate. SharePoint can do this. I’m sure there are other apps. Absolutely. Now that’s not the recommendation, but notice that to this point in the argument, there has been no discussion of mandating any type of process or competitive bid. In point of fact, SharePoint could support this because eSourcing 2.0 does not seek to mandate sourcing strategies (to be clear, SharePoint is NOT the recommendation). Whatever sourcing policies or practices that are being employed today can work within the eSourcing 2.0 model. eSourcing 2.0 is about using a system to capture important information, information that can be leveraged across the organization and in the future. If it can be done on the transactional side of the house; it can certainly be done on the strategic side of the house. And the good news? Between 60% and 70% of enterprises today already have the ideal system in place – a system that can handle a competitive bid if that is needed, a system that is managed by procurement, no less: an eSourcing tool. More next Friday. Comments and feedback welcome!

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