Why would a company's separate business units buy goods and services independently if centralizing procurement can produce volume savings that go directly to the bottom line? Why would a company route paper requisitions for approvals when they can be automatically distributed over the Internet in seconds? Why would a company keep service contracts in file cabinets across the organization when they can be archived electronically with a complete history of all the negotiations that took place? And, what insurance executive wouldn't want to know more details about the company's spending activities?Volume discounts. Shorter procurement cycle times. Less paper. More informed purchasing decisions. These are the main reasons electronic procurement and sourcing have gained popularity in the past few years across many industries, including insurance (see "Procurement And Sourcing Software Gains Popularity," page 30).
Insurers such as AEGON, John Hancock, Fireman's Fund, Allstate, Cigna, MetLife, and Prudential have implemented e-procurement and e-sourcing technologies. And large companies that use these technologies typically save millions-even hundreds of millions-of dollars per year, according to Marc Osofsky, vice president of marketing and business development at Frictionless Commerce Inc., a Cambridge, Mass.-based enterprise sourcing software firm.
The savings come from being able to capture purchasing knowledge and make more cost-effective, consistent decisions.
"If you look at what most companies spend, 60% to 80% is trapped in functional siloes," says Osofsky. "The IT group is doing its own sourcing. Marketing is doing its own sourcing. And generally, they're not applying good, professional sourcing discipline."
In addition, purchasing professionals operate in their own way with their own Excel spreadsheets and Word files, he says. "No one has visibility into what they're doing, and, if they leave, they take that knowledge with them."
The current interest in e-procurement and e-sourcing is akin to what happened with sales force automation in the 1980s and 1990s, Osofsky says. "Management is saying, 'I want visibility into this. I want a standard process. I want to look from my desktop and see how we're doing against our plan.
Indeed, using e-procurement provides more detail into a company's spending options and activities.
"Once you have all your transactions in one database, you can analyze them in many different ways," says Bryce Berg, director of U.S. procurement, at the AEGON Insurance Group, which has deployed an e-procurement system in 15 major sites.
"You can analyze it by spend category and by vendor. You can slice and dice the database any way you want to evaluate buying opportunities."
In addition, AEGON has grown through acquisitions, so each site had its own way of procuring goods. "It would be somewhere between difficult to impossible to leverage the spending power of such a decentralized company without this type of tool," he says.
E-procurement produces two primary benefits, according to Berg: productivity efficiencies and cost savings. "The productivity comes from automating a repetitive, manual process. And once it's automated, the efficiencies make a significant impact on procurement ROI."
AEGON's system-from Sunnyvale, Calif.-based Ariba Inc.-is also integrated with the company's legacy back-end financial system-so the entire process is automated, all the way to cutting the check, he says.
Here's how it works: Much like Internet shopping for consumers, employees browse online catalogs or link to vendor sites, and fill up a shopping cart.
From there, the software creates an online requisition and automatically routes it by e-mail for appropriate approvals. The routing process is based on rules that a company customizes in the system. The rules are flexible and easily changed, says Berg.
Requisitions always require financial approval, he says, and some need technical or legal approvals as well. "Whatever our normal approval process flow is for that type of requisition, we've created automated rules-based electronic routing for it."
Once approved, if the item is pre-negotiated, the request is automatically delivered to the vendor via the Internet. If the item is not pre-negotiated, a buyer reviews the request and sends it to the vendor.
This is significant improvement over AEGON's previous manual process, in which paper forms were distributed for signatures whenever someone needed products ranging from office supplies to computers, says Berg. "We had some (Microsoft Word) documents that we e-mailed around, but we had limited success with that."
The results? AEGON has been able to reduce the size of its procurement department by 25%, while handling four times the original volume of work. As for cost savings, the company is saving several millions of dollars per year through its e-procurement intiative, Berg says.
With such lucrative results, it's not surprising that 80% of companies are currently using a direct procurement system, according to AMR Research Inc., a Boston-based research and advisory firm.
"Most insurers did quite well during the boom times, so they didn't focus as much on cost cutting," says Frictionless' Osofsky. "In this current environment, they really have to focus on cost reduction. And any means to do that without firing people is quite attractive."
The time-consuming paper chase and inconsistency across business units slowed down procurement and sourcing at Fireman's Fund Insurance Co. as well, according Bob Neuhard, director of contracts, at the Novato, Calif.-based insurance company.
Fireman's Fund is applying new technologies and discipline to its supply management process as part of an overall corporate turnaround initiated by CEO Jeff Post 2-1/2 years ago, according to John Kozero, company spokesman.
Prior to deploying a contract management system from Nextance Inc., Redwood City, Calif., various business units of Fireman's Fund negotiated different contracts with the same vendors under different terms and conditions, Kozero says.
With its new system, however, the insurer is automating workflow, producing consistent best-practice negotiations, and leveraging its thousands of supplier relationships, according to Neuhard. And, as the company consolidates its contracts on the single Internet-based platform, it, like AEGON, is saving millions of dollars.
"We had one project alone where we had three different agreements in place with three business units," Neuhard says. "And by bringing them through one system, one method, one process, we saved $1.1 million."
Similar to AEGON's e-procurement system, Fireman's Fund's contract management system streamlines the process online. Employees create a requisition, which is automatically routed for approvals.
But, in this case, they're requesting services-such as outsourcing, software development, software licenses or application service providers. Once approved, a contract specialist looks for a master agreement in the system.
The newest version of Nextance's software, which is scheduled for user acceptance testing at Fireman's Fund this month, also contains a request for proposal (RFP) creation module, 18 template agreements and various clause libraries.
"We've developed what we think are best-in-class IT software development agreements, what we think are best-in-class outsourcing agreements-and they're all templates in the system," Neuhard says.
Clause libraries enable negotiators to further refine contracts based on best practices as well. "We have our primary fall-back position, our secondary fall-back position-however many fallback positions (exist), we've built them in each clause," he says.
Fireman's Fund's system also ensures that all required steps are taken when procuring services. These include a vendor pre-qualification procedure and RFP scoring and analysis, both of which currently occur offline.
Eventually, these functions will be added to the system, and the company also will integrate the Nextance system with PeopleSoft, which it uses to generate purchase orders.
"Basically, we're looking to have an end-to-end solution, which includes all the documentation related to a contract-all the red-lined versions of negotiations back and forth-the entire history-who you put it out to bid to, all the vendors that responded, the discussion regarding why we went down to these two vendors, and all the scoring criteria," Neuhard says.
Even vendor performance will be tracked on the system, he says. "All ongoing fulfillment will be in one spot, so as we move forward from year to year, we can have truly intelligent conversations about performance metrics and contract obligations and expirations. We will proactively manage the entire agreement."
What Fireman's Fund has is a combination of human professionalism as well as systemic discipline, Kozero says. "The combination has raised efficiency to an exponential power of ten."
Allstate Insurance Co. also anticipates improving efficiencies and reducing costs associated with procuring services by using an Internet-based system.
Specifically, the Northbrook, Ill.-based carrier hopes to reduce its outsourced labor management costs by 10% over three years using software from Fieldglass Inc., Chicago.
A better way
Deployed last December, Allstate's procurement system streamlines and standardizes the hiring and managing of contingent IT workers. "When we first started negotiations with Fieldglass, we had approximately 1,300 contingent workers on site," says Greg Hopkins, procurement specialist at Allstate.
"It was difficult to manage all the activities for that many people, such as on-boarding, off-boarding and time-keeping. And we were getting a lot of questions from suppliers about payments. We decided there had to be a better way."
The better way is the Web-based platform, called InSite, which enables Allstate hiring managers to create online requisitions and automate workflow all the way through the process of paying suppliers.
"We created a platform that has three universes in it-the buyer (Allstate), suppliers and workers," says Jai Shekhawat, CEO and founder of Fieldglass.
The company deploying the system begins by identifying its unique business rules for procuring services, he says. These rules define who is authorized to buy services and at what limits, who needs to approve requisitions and in what order, what skills outsourced workers must have, who the first- and second-tier suppliers are, and how long suppliers have to respond to a request.
After Allstate hiring managers create online requisitions, the system-like the AEGON and Fireman's Fund systems-automatically notifies the next person in the supply chain.
In this case, suppliers are notified to view a request on the dedicated Web site, and they respond by posting resumes of qualified candidates for hiring managers to evaluate.
If skills assessment testing and background checks are necessary, the system automates those procedures as well, and online checklists guide managers through the process of obtaining log-ins, ID badges and computers for contingent IT workers when they are hired, and relinquishing them when they leave.
The workers who use the system-now numbered at about 500-enter their time and expenses on the Web site. The system, in turn, feeds that data into Allstate's SAP system, which produces invoices for the suppliers to review and submit for payment-also online.
Overall, Allstate's services procurement system has shortened the time it takes to recruit outsourced labor for IT projects, says Hopkins, although he doesn't know by how much.
It also has reduced the number of inquiries the carrier receives from suppliers about their payments. "Anything we can do to eliminate the investigative work we need to do on our SAP platform saves us a lot of time," he says.
"Firms like Allstate are truly creating a competitive environment for procuring these services," says Fieldglass' Shekhawat. "And the moment you do that, the prices start to drift down to what the market will bear."
In addition, he says, Allstate can standardize around skill sets for contingent workers, clearly defining what they want. "They also can smoke out situations where they're overcharged," he says. "Supply meets demand in an organized way."
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