Buying In?

15 October 2006

How far has the facilities management sector embraced e-procurement strategies and tools, and has it won the promised benefits for buying and selling of services as it has for commodities? Frank Booty examines the state of play

A KEY CONSEQUENCE OF E-BUSINESS business-tobusiness (B2B) trading is closer integration of corporate IT systems with the web to allow linking of accounting applications for orders, invoices and payments. This is nothing new. Electronic data interchange (EDI) systems have been around for two decades but they have failed to achieve the expected level of take-up because they needed too much customisation to create common information standards between organisations.

Enterprise management systems have been promoted as more effective at controlling business finances, offering improved reporting and management information. But again these depend on consistent information coding using agreed cost centres, often varying significantly between clients and suppliers.

Many of the new systems and processes cannot make use of legacy data, and perpetuate the problem by creating more bespoke information. Smaller suppliers are typically not yet well geared up for web-based trading.

Much potential exists in the technology, not only to assist in bypassing cumbersome manual processes, but also to generate valuable management and benchmarking information. Expectation surrounds universal communications standards such as XML, a preferred choice by many for future e-business applications. Without common ground on information exchange, internet trading many never achieve its potential.

There are many problems associated with moves towards e-commerce. FMs should bear the following in mind:
... Portals can only create economies of scale if there are enough consumers and the volume of transactions is high, ie greater numbers of participants will bring greater economic benefits.
... Reliability of the technology and supply chain information is key if the system is to function efficiently.
... Many businesses or consumers need to streamline existing purchasing and procurement processes if economies are to be expected.
... Many procurement departments will want to meet/study their potential service providers. In FM the 'people factor' is important when assessing the quality of proposals.
... Usability factors affect the simplest of websites and complex procurement portals.
... While experts claim security of e-commerce transactions is effective, there are perceptions theyfre not. Perceptions are the most difficult to overcome.

How much procurement is actually going by this route? BIFM has clear views on this point. “Firm statistics seem hard to come by, and it’s difficult to quantify what organisations are referring to when they quote, say, a percentage of spend being via e-commerce,” says BIFM. Eauctions have certainly become a popular tool, but there doesn’t seem to be much evidence of e-commerce within, or where it impacts on, the FM industry. The retail sector organisations are probably leaders in e-commerce within the UK, and they have many years experience of ‘pull’ strategies from point of sale back through their supply chains.

Global Procurement Group (GPG), which services organisations with turnovers between £5m and £100m, reckons the typical cost of raising non-core purchase orders for a UK company is £55 per order and for public sector organisations £97 per order. When one realises non-core purchase orders constitute on average 80 per cent of all organisations orders, the sums soon mount up.

Darren Craven, GPG’s sales and marketing director, says, “Using our eprocurement service a company with a turnover of £40m and a non-core spend of £4m can achieve savings of up to £420,000 a year.”

Alan Buxton, product director, TradingPartners, says, “We save clients £millions every week with our purchased cost reduction procurement service. We estimate that out of the FTSE 100, 60 per cent of companies use e-commerce for procurement. But you could also say the large majority of companies - maybe 80 per cent - big and small, use some form of e-commerce for buying products in highly commoditised markets, such as office stationery. Indirect goods are also more likely to be purchased using ecommerce.”

Larger organisations have been able to take advantage of opportunities due to the greater demand they have, but SMEs can also benefit, especially through the use of e-procurement service providers, and especially through buying consortia who are using e-commerce as a platform.

Craven adds, “The only barrier that may stop an SME utilising e-procurement technology for the smaller client is the cost of obtaining and implementing such a solution. We offer the g- Apex platform for £10 per month, an affordable price for SMEs. Indeed we’ve designed our solution to meet the needs of SMEs.”

Government has pushed the public sector hard to bring in ecommerce but this often results in organisations doing something to get a tick in the box without necessarily doing it for the right business reasons.

“The Government via its OGC.Buying.Solutions operation has facilitated e-procurement in the public sector by setting up a framework agreement whereby customers can hire e-procurement services as required,” says Buxton. Those services can include hiring organisations such as TradingPartners to run eAuctions for the public sector for anything from telecoms to sanitary ware for local housing properties, to temporary labour, to establishing a range of 'e' services including e-sourcing and the Zanzibar marketplace (see case study page 60).

E-procurement services are beyond the means of most organisations to develop in house, and the benefit of outsourcing this need is clear. As with all outsourcing, the choice of service provider is crucial, and it may be effective to use different e-procurement service providers for different service areas so as to gain benefit from specialist knowledge of the supply sectors. The BIFM advises that bringing in outside help in these cases is a benefit not a threat.

Recently outsourced business process provider Liberata joined forces with procurement processing company Xchanging in a five-year procurement outsourcing partnership. Liberata will be creating a full-service BPO (business process outsourcing) offering for the public and private sectors here which should enable it to make use of Xchanging’s experience. That should improve Liberata’s procurement offering and ensure the delivery of a full-service approach to its clients.

Strategy
Many tenders are still being invited based on historic demand rather that the strategic needs of the business. There will always be a role for a good tactical buyer, but purchasing professionals have to also think strategically if they are to have a positive influence on their organisations, and it’s vital the purchasing strategy reflects the business plan. In the case of inviting tenders for a three-to-five year contract you are looking almost six years into the future. What will your business need then? What you need in two years time will probably not be what you need now, so what you’ve done over the past three-to-five years is almost certainly irrelevant.

Another aspect of the cultural change needed is for buyers to be thinking in terms of how what they buy impacts on what their company sells. This is a way in which the purchasing team can fully integrate themselves into the strategic aspects of their business and demonstrate what they can bring to help achieve the company’s goals, advises BIFM.

FM can benefit from e-procurement best in the commodity areas and there are good examples of savings having been achieved in purchasing telecoms, computers, fleet services and other areas. E-auctions can open up entirely new supply areas, and a well constructed and conducted e-auction exercise will probably bring benefits. As with any project, investing time up front to develop the requirement and get the specification right is vital for a good result – skimping in this area must be avoided.

The key question for FMs, is can cost-driven eprocurement be appropriate in a service environment where added value and partnering cannot be easily realised? Trying to break service contracts down into transactional elements so as to suit them for e-auction is common at the moment. It looks good on paper, but does not seem to be proving effective in practice, says BIFM. There are some areas where this can work, but if cost is the prime driver, the service element is difficult to reconcile.

It’s possible to achieve benefits by dealing with, and fully resolving, the service and valueadded aspects of the specification in advance, but this is an area where some buyers are not thrashing out all of the issues in advance and the likelihood in these cases is that the contract will not be mutually beneficial to both parties.

Focusing purely on price can often preclude achieving value, especially if the targets are simply driven. Again the need to think strategically is paramount; what is the business trying to achieve and what do we need to buy to best support that?

Buxton reckons cost is usually one element in any sourcing decision and so it would be wrong to discount cost-driven tools simply because they don’t provide the full picture. His advice is to use the cost-driven tools to manage costs, use other techniques to manage added value. Incidentally, says Buxton, there are tools becoming available that incorporate value-add into tools that previously used to be just about price - multi attribute auctions.

E-procurement tools - e-sourcing and eauctions - can be used for any type of product, including those with service elements such as office furniture. Buyers can choose suppliers who meet the specified service level criteria and enter them into an e-auction where suppliers bid on price – price only e-auctions. As an alternative, the buyer could request the suppliers to take part in a multi-attribute e-auction where the suppliers bid on price as well as the levels of quality they could offer to win the contract, such as delivery times, ISO certification, etc. These types of e-auctions are becoming more attractive to buyers and suppliers because they take account of the fact that a supplier’s bid for a contract is made up of several attributes, of which price is only one.

Looking to the future, what approach should FMs take? The BIFM is clear. It says eprocurement is here, and it can be a real benefit to all parts of the supply chain if handled correctly. The problems are occurring where people are not making the investment to do it well, and too much focus is maybe being given to e-auctions at the expense of other ecommerce functions such as on-line ordering and electronic bill paying.

Where organisatons have made large initial savings through the e-auction route there are issues to be faced about what they do when those contracts run out. The opportunity to achieve another step change isn’t there, so expectations have to be managed, but ecommerce doesn’t stop you talking to the market place and looking at ways of doing things differently.

Some larger organisations seem to have issues integrating e-commerce into their legacy IT systems, but this should be less of an issue for an SME, and on-line ordering and bill payment can make a significant difference to their overheads. The success of on-line auction houses and the way they have adapted their offering to support small businesses ought to be evidence enough that the concept works.

“People have misconceptions about e-auctions being purely about price, however that’s not true, says Buxton. “Because of the advancement in e-auction technology, methodology and expertise, e-auctions are now in line with the CPO’s focus on value creation and can take into account price as well as all types of quality and service variables. Procurement professionals should embrace the benefits that e-auctions and e-sourcing bring to the purchasing table – time savings, cost savings, access to a greater number of suppliers, and fair market prices.”

St Mary’s NHS Hospital Trust
St. Mary’s NHS Trust in London's Paddington has become the first in a consortium of 17 Trusts to connect to its suppliers via the Zanzibar Managed Service. Zanzibar backers, OGCbuying.Solutions, and consultants, PA, say the online procurement marketplace will deliver estimated savings of over £4m over five years for St Mary's.

Mansel Chamberlain, procurement director of the Northwest London NHS Procurement Confederation, says, "The 17 NHS Trusts in the Northwest London Procurement Confederation spend £1bn a year on supplies, and the potential for making savings is enormous. Five of the largest Trusts, representing over 50% of expenditure, are now committed to rolling out Zanzibar.”

OGCbuying.solutions’ chief executive, Hugh Barrett says, "St Mary’s demonstrates that trading electronically with suppliers on the Zanzibar Managed Service can bring huge benefits in terms of saving time and money in the procurement process. St Mary’s experience shows that the transition to Zanzibar can be achieved quickly with little disruption to the organisation."

What has been your experience of buying or selling FM services electronically? Have the e-business tools worked? Did you select the right supplier? Did you save money? PFM would like to know you views. Email pfm@imlgroup.co.uk

E-auctions provide an electronic forum where a number of buyers and sellers meet and exchange information and bids online, expanding sales opportunities for sellers, and often reducing the purchase price for buyers of bulk goods or items that are hard to find.

Driving e-procurement in FM
● Quicker Pre-qualification processes.
● Production, copying and distribution of tender documentation can be significantly reduced.
● Economies of scale are created where individual packages of services are procured through the medium of a ‘club’ e-commerce site. This allows clients access to a global catalogue of business supplies and equipment from approved suppliers, helping them to search for the best value for money in their chosen product category.
● Online tendering of commodities such as utilities, where each bidder is allowed to make offers within a certain timeframe and can view the result live in the form of a ranked league table

Supply chain management (SCM) concerns the planning, scheduling and control of the supply chain, which is the sequence of organisations and functions that mine make or assemble materials and products from manufacturer to wholesaler to retailer to consumer.The driving force behind SCM is to reduce inventory.

More info
BIFM www.bifm.org.uk
TradingPartners www.tradingpartners.com
Global Procurement Group www.gpgworld.com
Liberata www.liberata.com
Xchanging www.xchanging.com
OGCbuying.solutions www.ogcbuyingsolutions.gov.uk
FMA www.fmassoc.org

● Frank Booty is a freelance writer