Calculating eProcurement return on investment

At its simplest level eProcurement describes the business-to-business purchase and sale of supplies and services over the Internet. From access to online product and catalogue information through electronic payment services, the Internet facilitates seamless exchanges in support of electronic commerce.

Properly planned and executed, an eProcurement system will reduce the time required to complete transactions, prevent maverick purchasing, and capture information that allows management to scrutinise buying patterns. It also prepares the buying organisation with statistical tools to better negotiate new contracts.

Tangible benefits from the use of eProcurement include:

Reduced cost of purchases through improved sourcing on indirect and direct commodities
Reduced operational costs through the elimination of manual processes
Rationalisation and optimisation of supply chain
Reduction or complete elimination of maverick spend
Reduction in order errors and returns
Decreased cycle times
Comprehensive, automated auditing and tracking
Increased and more sophisticated reporting

Intangible benefits include:

The ability to introduce or improve commodity and supplier management
A stronger relationship with preferred suppliers
Reduced turnaround and improved throughput
Improved trending of cost-centre spending
Improved visibility of price changes
Improved spending controls and employee compliance

Any return-on-investment (ROI) calculation has to take into account the costs and benefits of eProcurement system implementation .Calculating the tangible elements of ROI for eProcurement is fairly straightforward, for example:

Compliance Savings: Eliminating maverick spend by restricting buyers to contracted suppliers and leveraging the opportunity provided by eProcurement to implement an eSourcing strategy creates an average saving of 13.2% in goods and services, according to research by Aberdeen Group.

Labour Savings: Gartner Group states that manual procurement is, on average, an 11-step process with administration costs to process a purchase order requisition ranging from £25 – £40 depending on the cost of a company’s resources.

Through approval workflow and administrative efficiencies, eProcurement can reduce this cost by as much as 80%. It is more difficult to accurately account for the intangible benefits, but their organisational impact can nonetheless be great and they should therefore be factored into any business case.

Building a business case

It is important to understand executive management’s goals for the company and make sure that initiatives are in line with their objectives. Any business case should align with the organisation’s corporate goals and objectives.

Set clear and concise project goals and objectives. What is most important to the company – to lower costs, find revenue creators or simplify business processes?
Measure business objectives, costs and risks.
Complete an ROI analysis using best and worst case scenarios and clearly state the expected results.
Use quantifiable data to measure what returns can be expected.
Determine how management will measure the project a success (eg lower operating costs, supplier rationalisation, lower purchasing costs etc).

The ROI calculation should not include too many drivers or factors or it will make it difficult to track and measure going forward. Prioritise the two or three drivers that will bring the greatest benefit to the company.