The Advanced Sourcing & Negotiation Benchmark Report

The Art & Science of the Deal

January 2007

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The Advanced Sourcing & Negotiation Benchmark Report

Executive Summary
In retrospect, the initial e-sourcing waves that began a decade ago resembled a corporate “crash diet,” leaving an immediate and noticeable impact on the enterprise, but also a daunting challenge to develop a new and different program that could sustain these benefits and keep the “weight” off. As the use of basic sourcing strategies has reached saturation levels with certain categories, enterprises must utilize advanced sourcing strategies across a wider range of categories to deliver the same results.

Key Business Value Findings
Enterprises that employ advanced sourcing strategies are positively impacting product development cycles and building stronger supplier relationships by making better, moreinformed decisions. They are also driving innovation and to be certain, they are saving more money than their competitors. On average, the enterprises participating in this benchmark report:
• •

Identify savings of 11.9% per sourcing event Realize savings of 9.4% per sourcing event (savings that are actually implemented and “realized”) Utilize a formal strategic sourcing process on 43% of their total spend Utilize e-sourcing across 20% of their total spend Employ advanced sourcing strategies on 15 to 40% of their sourcing initiatives

• • •

Considering the benefits seen by the average e-sourcing program, it is surprising that a full 36% of this benchmark’s respondents (and 20% of all large enterprises) fail to utilize any level of e-sourcing.

Implications & Analysis
Best in Class enterprises use formal strategic sourcing and e-sourcing processes to drive greater e-sourcing throughput, achieve higher than average savings, and provide greater value to the enterprise. They are 32% more likely to employ advanced sourcing strategies and proclaim a 54% edge in their proficiency. Their superior performance is perhaps best exemplified by having realized savings results that are 39% better than their competitors.

“We implemented e-sourcing in 2004 and began an aggressive program focused on five indirect categories. We achieved our goals in the first three years. This year (2007), however, our “target cost reduction” is lower than what we delivered in 2005 because the opportunities for savings are just not there. We will miss our target unless we quickly expand our focus and aggressively target another series of categories for e-sourcing.” – Director, Strategic Sourcing; Global Engine Manufacturer

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Table 1: The E-Sourcing Advantage (Best in Class vs. Others) Performance Area
Formal sourcing processes established % of spend that is strategically sourced E-Sourcing application in current use % of spend that is e-sourced Average identified savings (per event) Average realized savings (per event) % of e-sourcing events using price as sole award criteria Advanced sourcing proficiency (self rating on scale to 100%) Source: AberdeenGroup, January 2007

Best in Class
100% 60.7% 97% 32.4% 13.7% 11.8% 39.0% 51%

All Others
65% 39.6% 57% 16.2% 11.2% 8.5% 41.5% 33%

Recommendations for Action
The gradual erosion of savings rates from e-sourcing events that we have seen over the past few years will continue. The following strategies will help enterprises maximize their returns:

Develop, augment, or outsource process, category, supply market, and technology expertise. Establish centers of excellence for sustainable proficiency. Employ advanced sourcing strategies across a wider set of categories. Look at complex categories, including services, logistics, T&E, and direct/strategic materials. Focus on realized savings and correlate them to enterprise-level financial metrics (e.g., EPS).

Aberdeen Group has tracked the usage of and results from e-sourcing since its inception. This benchmark builds upon those earlier research efforts by examining the opportunities, challenges, and results of the sourcing programs of over 160 enterprises. Several case studies are included in this report to provide examples of the different sourcing strategies that enterprises are employing today to extend the value of their e-sourcing programs. The findings and recommendations of this report are intended to aid sourcing professionals drive sustainable improvement through their strategic sourcing and esourcing processes by utilizing advanced sourcing strategies and technology.

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Table of Contents
Executive Summary .............................................................................................. i Key Business Value Findings.......................................................................... i Implications & Analysis ................................................................................... i Recommendations for Action..........................................................................ii Chapter One: Issue at Hand.................................................................................1 Technology-enabled Sourcing........................................................................ 1 Advanced Sourcing Primer ............................................................................ 2 An Ounce of Prevention is Worth a Pound (or More)..................................... 3 Chapter Two: Key Business Value Findings .........................................................5 No Retreat (Continue to Advance)................................................................. 5 Challenges and Responses........................................................................... 6 Sourcing Excellence ...................................................................................... 8 Chapter Three: Implications & Analysis............................................................. 10 Process and Organization ........................................................................... 12 Knowledge & Technology............................................................................. 12 Strategic Sourcing Automation – No Pain, Strong Gains ............................. 12 Pressures, Actions, Capabilities, Enablers (PACE)...................................... 13 Chapter Four: Recommendations for Action ...................................................... 15 Laggard Steps to Success........................................................................... 15 Industry Average Steps to Success ............................................................. 16 Best in Class Next Steps ............................................................................. 16 Featured Underwriters ....................................................................................... 17 Author Profiles....................................................................................................20 Appendix A: Research Methodology .................................................................. 21 Appendix B: Related Aberdeen Research & Tools ............................................. 25

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Table of Contents Figures
Figure 1: Main Pressures Driving E-Sourcing Adoption........................................4 Figure 2: The Return on Advanced Sourcing Strategies ...................................... 6 Figure 3: The E-Sourcing Advantage - Part 1 (Best in Class vs. Others) .............8 Figure 4: The E-Sourcing Advantage - Part 2 (Best in Class vs. Others) .............9 Figure 5: Maturity of E-Sourcing Initiatives in Benchmark Report ...................... 22

Tables
Table 1: The E-Sourcing Advantage (Best in Class vs. Others)............................ ii Table 2: E-Sourcing KPIs – How Do You Rate? ...................................................5 Table 3: E-Sourcing Challenges and Responses .................................................7 Table 4: E-Sourcing Competitive Framework ..................................................... 11 Table 5: Extending E-Sourcing – Planned Investment in the Next 6 to 18 Months13 Table 6: PACE (Pressures, Actions, Capabilities, Enablers)............................... 14 Table 7: PACE Framework ................................................................................. 23 Table 8: Relationship between PACE and Competitive Framework ................... 24 Table 9: Competitive Framework........................................................................24

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Chapter One: Issue at Hand
Key Takeaways • The initial shock to supply market equilibrium created by the early e-sourcing waves created a “crash diet” effect for most enterprises: immediate and significant results that were difficult to sustain. Sustainable results in e-sourcing are achieved by sourcing teams that leverage a blend of category, process, supply base, and technology expertise. Deteriorating supply market conditions and diminishing returns from the “re-sourcing” of categories exacerbates the challenge to sustain, much less extend the early successes. The majority of enterprises fail to source more complex categories. The advanced sourcing functionality available in many enterprise-level e-sourcing applications is severely underutilized by sourcing professionals today.

• • • •

T

he primary role of the procurement function in strategic business initiatives has begun to shift in recent times from a singular focus on cost savings/avoidance to the broader management of supply availability and risk, while still maintaining competitive cost structures. And though its reported or “realized” savings notably lags “identified” savings, e-sourcing, in the broadest sense, Competitive Framework has generally over-delivered on its promise of savings for Key the enterprise. In fact, the general adoption of e-sourcing has served as the major catalyst in the transformation of many The Aberdeen Competitive corporate procurement organizations from traditional back- Framework defines enteroffice function to strategic business partner. Yet, as the early prises as falling into one of adopters return time and again to the same e-sourcing well, the three following levels of the return on their e-sourcing initiatives has begun to erode. practices and performance: This, in turn, will slow the future investment in many procurement-related areas and curtail this group’s growing visi- Best in Class (20%) — Practices that are the best bility across the enterprise. currently being employed and significantly superior to Technology-enabled Sourcing the industry norm Technology-enabled sourcing, or e-sourcing, is the use of Industry Average (50%) web-based applications and decision support tools to auto— Practices that represent mate the strategic sourcing (and/or spot sourcing) process. E-sourcing is most commonly associated with the supplier the average or norm negotiation process where a buyer creates an online request Laggards (30%) — for information/price/quote (“e-RFx”) or reverse auction that Practices that are significontains: a) business and category requirements, b) defined cantly behind the average business rules that drive bidding activity and control partici- of the industry pant visibility, c) an opportunity for suppliers to provide the requested data, and d) an evaluation framework. The relatively high e-sourcing adoption rates reflect the application’s ability to model the traditional offline strategic sourcing process. Common event or negotiation types include RFI, RFP, RFQ, tender, reverse aucAll print and electronic rights are the property of AberdeenGroup © 2007. AberdeenGroup • 1

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tions, and one-to-one or one-to-many negotiations. Key to achieving sustainable results in e-sourcing is the ability to leverage category, process, supply base, and technology expertise into every online negotiation. Many systems now offer robust knowledge management capabilities, including RFx template creation, document repositories, and standardized workflows that enable rapid event creation. Advanced Sourcing Case Study: Brunswick goes Bowling for Dollars Enterprise: Brunswick Corporation is a leading global manufacturer and marketer of boats and other sports and leisure equipment and accessories. Category: Global Freight spend for 600 shipping lanes and 3 container types. Strategy Employed: Multi-stage e-RFx, utilizing an embedded optimization engine for decision analysis. Description: Brunswick needed a faster, more effective way to source its global freight spend. Brunswick structured a multi-stage e-RFx that accepted final bids in sealed bid format from 20 suppliers. The sourcing team then utilized the bid optimization engine to create various award scenarios for the 6,000+ data points based upon different combinations of allocation and business constraints including container size, number of suppliers per region, and cost. Results: While the award decision was not the lowest cost scenario, significant savings were achieved. The sourcing team now has a full view into the different cost components of their global freight suppliers and will be better positioned to track/predict future price movements. The sourcing cycle time for this category was cut in half and the team now has a template to leverage for future e-sourcing events in this category. Brunswick also believes that the development of an RFx template combined with bid optimization will save the team an additional six months on each future freight bid.

Advanced Sourcing Primer
Aberdeen research has previously shown that advanced sourcing capabilities have enabled enterprises to identify on average an incremental level of savings of 12% above standard price-driven e-sourcing events. The ability to wring incremental value from an online negotiation justifies a significant investment in these capabilities, be it training, resources, or the tools themselves. But, the tools and strategies of advanced sourcing and negotiation can move enterprises far beyond basic price discovery. Advanced sourcing and negotiation is blend of art and a science, combining business, category, and supply expertise with leading e-sourcing technology and associated value-based decision support capabilities including:

Bid optimization, which uses advanced analytical tools to simultaneously negotiate and evaluate complex bid structures against a wide range of interdependent sourcing objectives, variables, constraints, and scenarios. Cost modeling, (including total cost of ownership “TCO” evaluation) which focuses on identifying and analyzing all of the cost components and associated cost drivers related to a supplier’s bid.

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Matrix or tiered pricing for sophisticated bid collection. Tiered pricing captures supplier bid information based upon distinct volume ranges while matrix pricing captures different bid pricing based upon certain factors related to a specific bid item. Flexible bidding, which enables suppliers to: o o o Modify the buyer-defined RFx by suggesting alternative specifications or substitute materials that reduce costs or increase value Vary order quantities to define volume discounts Develop a distinct bundling of items to offer a unique bid package

Product lifecycle sourcing (for the “design-to-source” process) integrates Product Lifecycle Management and e-sourcing capabilities on a collaborative platform to enable product teams make sourcing-informed design and engineering decisions as well as extend the product lifecycle through effective product cost management. Team and automatic scoring capabilities place a value on the different price and/or non-price attributes of a supplier’s bid to develop a ranking of all bids. Team scoring enables individual stakeholders to rate the value of a supplier’s individual bid while automatic scoring rates supplier bids automatically based upon a pre-defined scoring system. Advanced Sourcing Case Study: Fleet Afoot

Enterprise: Food and beverage company Category: $80 Million in Diesel Fuel Strategy Employed: Reverse auction and bid optimization Description: Facing dramatic increases in diesel fuel prices, the sourcing team took an advanced sourcing approach to managing costs while balancing the needs of 5 separate business divisions. They conducted a series of reverse auctions by geography that focused on supplier margins and transportation costs (cost components of delivery vs. actual fuel costs) to capture supplier bids. The reverse auction results flowed directly into a bid optimization engine which was used to determine optimal supplier awards given specific business constraints per business unit and location. Results: The company captured competitive pricing and optimized total cost awards within 3 days. In an escalating fuel market, they achieved savings on more than half of locations while ensuring all business constraints were met. The team also gained a much better understanding of the supply market and the cost structures in this category.

An Ounce of Prevention is Worth a Pound (or More)
Best in Class CPOs typically prioritize the management of their relationships over cost reductions. Similarly, sourcing professionals, who live “where the rubber hits the road,” deploy sourcing automation to streamline processes first and then to reduce costs. In either case, cost reduction is a secondary driver (Figure 1).

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Figure 1: Main Pressures Driving E-Sourcing Adoption

Streamline the sourcing process
45%

68%

Reduce supply costs
30%

Increase spend under management Improve visibility into sourcing initiatives

28%

Improve supplier management and collaboration

27%

Centralize processes 0% 20%

27%

40%

60%

80%

Advanced Sourcing Case Study: Going Postal Enterprise: USPS Category: $30MM in Pallets to be delivered to 25 unique distribution centers. Strategy Employed: Flexible bidding with optimization after earlier reverse auction. Description: The purchasing and supply management team at USPS needed to source its supply of shipping pallets for 25 DCs across the U.S. After an earlier reverse auction, the category team felt that there was an opportunity to improve the results based upon their historical offline strategic sourcing experience. Using the reverse auction as a baseline, USPS created a flexible bidding event with optimization that enabled suppliers to participate in a second round of bidding where unconstrained by specific requirements. Suppliers were able to define the structure of their entire bid and express conditional discounts. Results: USPS’ use of flexible bidding with optimization enabled suppliers to define: a) specific bid bundles, which created new volume discounts, b) production schedule changes c) flexible delivery times d) supply locations, and e) payment terms. An incremental savings of 9% was achieved by allowing the suppliers to define the market for pallets. An additional benefit was a key location no longer being supported by a single source.
Source: AberdeenGroup, January 2007

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Chapter Two: Key Business Value Findings
Key Takeaways • • • • • Average identified savings per e-sourcing event has gradually decreased from 14.3% in 2005 to 11.9% today. Savings leakage continues to present a significant opportunity for procurement organizations as 21% of identified savings is not captured. 36% of enterprises report no current usage of e-sourcing. Those with active e-sourcing programs only source 20% of their total spend. 40% of e-sourcing events use price as the sole award criteria.

S

ignificant savings continues to be the headline from the average sourcing team, even though there is a downward trend overall. While this is a concern, a far greater one is the prevalence and sheer size of savings leakage that occurs at the end of the strategic sourcing process. The loss of 21% of identified savings is costing the average enterprise millions dollars annually and must become a priority of the highest order. Table 2: E-Sourcing KPIs – How Do You Rate? Performance Area
Formal sourcing processes established % of spend that is strategically sourced E-sourcing application in current use % of spend that is e-sourced Average identified savings (per event) Average realized savings (per event) % of e-sourcing events using price as sole award criteria Advanced sourcing proficiency (self-rating on scale to 100%)

Average Result
72% 43.4% 64% 20.0% 11.9% 9.4% 40.2% 36%

Source: AberdeenGroup, January 2007

No Retreat (Continue to Advance)
Countering the significant leakage to some degree is the growing use of advanced sourcing strategies like optimization, complex pricing, and team or automatic scoring, that have been shown to deliver incremental savings exceeding 10%. Perhaps more importantly, these tools can enable a more complete bid evaluation focused on identifying the highest-value versus lowest-cost suppliers. The research also shows that advanced sourc-

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ing strategies are being used to shorten sourcing and product development cycles and to positively impact product innovation. Table 2 below shows how often advanced sourcing strategies deliver significant savings and/or drive innovation as judged by the respondents. Figure 2: The Return on Advanced Sourcing Strategies

Prod. Lifecycle Sourcing T eam scoring Flexible bidding Alternative bidding Optimization Matrix or tiered pricing Multi-stage sourcing Cost Modeling 0% 10% 28% 20% 35% 27%

46% 19% 27% 13% 27% 41% 40% 43% 20% 30% 40% 14% 17% 19% 50% 60% 70%

Significant savings

Drives innovation

Source: AberdeenGroup, January 2007

Challenges and Responses
It is clear that the gains made by procurement over the past decade are significant and have helped elevate the function within the enterprise. Yet, with increased visibility comes an expectation of consistent execution and delivery. Long gone are the days of the conference room pilot with a heavy executive presence and millions of dollars in identified savings. Many procurement organizations must work in a deliberate fashion to get their “house in order” if they are to maintain their momentum and continue to prove out the benefits of engaging procurement. For those that have just concluded their initial sourcing waves, that was the easy part…this is where it gets interesting.

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Table 3: E-Sourcing Challenges and Responses Challenges
Inability to engage business stakeholders to adopt standardized processes

% Selected
41%

Responses to Challenges
Establish standard strategic sourcing processes Establish formal strategic sourcing organization Set metrics and incentives for business unit adoption

% Selected
53%

38%

18% 50%

Lack of executive support for strategic sourcing

31%

Secure executive support for strategic sourcing initiative Pilot e-sourcing tool to prove value of strategic sourcing and e-sourcing improvements Hire experienced procurement executive to develop/lead strategic sourcing organization

49%

21%

Lack of strategic sourcing process expertise

29%

Establish standard strategic sourcing processes Establish formal strategic sourcing organization Use external consulting group to help develop strategic sourcing process and program Hire full time employees with required expertise

53%

38%

35%

31% 31% 18% 53% 18% 12%

Limited resources to support e-sourcing

27%

Hire full time employees with required expertise Use On-Demand e-sourcing solution

Overcoming inefficient sourcing process and disparate or limited sourcing automation systems

23%

Establish standard strategic sourcing processes Use On-Demand e-sourcing solution License an e-sourcing solution for company-wide rollout

Insufficient visibility into spend data

22%

Adopt spend intelligence technology

28%

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Advanced Sourcing Case Study: Design-to-Source Enterprise: Fortune 100 industrial manufacturer Category: Diesel engine components. Strategy Employed: Product Lifecycle Sourcing platform to provide a detailed part feature-based, should-cost analysis performed by a cross-functional team. Description: The engineering team, facing significant cost overruns and delays late in the design cycle of one of its main product lines, decided to utilize an analytically-driven Product Lifecycle Sourcing application to better understand cost drivers of certain parts and determine how to reduce those costs through design and requirements modifications, part standardization opportunities, and additional e-sourcing. Results: The expanded team analyzed an initial set of key parts and found that 60% of the parts had significant cost savings opportunities. The cross-functional team was ultimately able to reduce the annual cost of the parts analyzed by a total of 8%, which resulted in a 3% savings in the total cost of the product line while maintaining the overall quality of the components.

Sourcing Excellence
Best in Class enterprises use formal strategic sourcing and e-sourcing processes to drive greater e-sourcing throughput, achieve higher average savings, and provide greater value to the enterprise. They are 32% more likely to employ advanced sourcing strategies and proclaim a 54% edge in their proficiency in their usage. Their superior performance is perhaps best exemplified by having realized savings results that are 39% better than their competitors. Figure 3: The E-Sourcing Advantage - Part 1 (Best in Class vs. Others)
60%

40%
BIC All Others

51%
20%

33%
0% Advanced sourcing proficiency

32% 16%
% of spend that is e-sourced

Source: AberdeenGroup, January 2007

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Figure 4: The E-Sourcing Advantage - Part 2 (Best in Class vs. Others)
14% 12%
BIC

10% 8%

13.7% 11.2% 11.8% 8.5%

All Others

6% Identified savings Realized savings

Source: AberdeenGroup, January 2007

Advanced Sourcing Case Study: Some TLC for TCO Enterprise: EMEA-based conglomerate concentrated in consumer packaged goods and financial services Category: Processed foodstuffs (private-label) Strategy Employed: Total Cost of Ownership modeling to understand the cost components. Description: Conglomerate seeking better visibility into the cost breakdown in the production and delivery of private-labeled processed foodstuffs to better understand and manage potential price fluctuations and to determine if they could leverage better transportation pricing for the goods currently Delivered Duty Unpaid (DDU). Results: With the help of outside consultants, the company modeled a complex TCO formula that broke down the cost components into the following buckets that build to a final single price bid
• • •

Production cost: including raw material costs, labor cost, and other production costs COGS cost: primarily overhead DDU: transportation and other delivery cost

The suppliers were able to place their cost components into an Excel template and upload them directly into the e-RFx where they had visibility into their current rank in the event based upon a single ‘all-in-price.’ The conglomerate reported significant savings from the process and its category team has expanded visibility into the supply/commodity markets to better anticipate future price fluctuations. They intend to utilize this strategy across their entire private-label food categories.

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Chapter Three: Implications & Analysis
Key Takeaways Best in Class enterprises outperform their peers in many fronts. They . . . • • • • • Achieve 39% greater cost savings/avoidance per e-sourcing event Use e-sourcing for twice as much of their total spend Apply strategic sourcing practices to 50% more of their spend Are 32% more likely to employ advanced sourcing Rate themselves 54% more proficient in advanced sourcing strategies

W

hile cost savings/avoidance is a major objective of strategic sourcing groups across enterprises, it is not in and of itself the only metric to gauge overall sourcing performance. Whether or not you use Kraljic’s portfolio “We prepare an e-sourcing activity model, the goals and objectives in managing log that compares actual activity a specific category will depend on how you and savings to budget and is reclassify it; the type of category it is (strategic vs. tactical), how it is used (direct vs. indiviewed weekly by both our CPO rect), and the quantity you expect to use. For and CFO.” – Sr. Mgr., e-Sourcing more strategic supplier relationships, cost Operations, Home Improvement may barely enter the equation. Aberdeen has Retailer therefore identified Best in Class sourcing organizations based upon their level of process automation, process standardization, and advanced sourcing expertise. Research findings suggest a two-to-one correlation between an enterprises’ approach to strategic sourcing and the success of their e-sourcing program (i.e., enterprises with these characteristics are twice as likely to succeed as their peers). Table 5 segments e-sourcing users based on their characteristics in four categories required for effective system usage and increased spend management:

Process – The level of sourcing standardization across the enterprise and the relative maturity of the processes in place. Organization – The centralization of sourcing efforts within the enterprise. Organizational structure, skills, and decision-making alignment across the company. Program visibility by executive leadership; business stakeholders’ engagement. Knowledge – Level of strategic sourcing, category-specific, supply market, and technology expertise; platform to leverage knowledge across extended organization Technology – Existence of sourcing automation, extended strategic sourcing automation to include spend analysis and contracts; advanced sourcing capabilities

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We believe that all readers can use this framework to more specifically assess their own organization’s e-sourcing competence and to determine the actions they can take to improve their overall performance. Table 4: E-Sourcing Competitive Framework Laggards Process
• No formal enterprise-wide strategic sourcing process Processes are fully manual No process visibility Loose processes employed in certain instances Lack of a formal sourcing organization Direct and Indirect Materials may belong in separate organizations • •

Industry Average
Some level of process standardization across enterprise Processes are partially automated Some visibility into process • Sourcing resources decentralized across business units or region Direct and Indirect Materials groups often linked • • • •

Best in Class
Strategic sourcing processes standardized across enterprise Uniform processes mapped to technology for complete automation Process compliance is managed Formal sourcing organization Centralized capabilities Direct and Indirect Materials Groups aligned and closely linked Sourcing and category proficiency Platform to leverage expertise Emerging advanced sourcing capabilities Extended strategic sourcing footprint including Spend Analysis, ESourcing, and Contracts Extended advanced sourcing capabilities including external optimization and PLM applications

• • •

• •

Organization

Knowledge

No or limited eSourcing Capabilities Limited strategic sourcing capabilities

• • •

Sourcing and category competence Lack of advanced sourcing capabilities Will leverage external support/services on occasion Some complementary technologies in place Emerging application expertise to enable the sourcing of more complex categories

• • •

Technology

No or limited experience with esourcing applications Limited use of other supply management technologies No advanced sourcing traction

Source: AberdeenGroup, January 2007

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In each of the above categories, our survey results show that the firms exhibiting Best in Class characteristics also employ the strategies and approaches discussed below.

Process and Organization
Best in Class enterprises are more disciplined in their management of the sourcing process and the supporting organization. They . . . • • • Work aggressively to develop, formalize and implement strategic sourcing expertise Map their processes to available sourcing technologies Organize themselves uniformly around their process expertise, typically centralizing strategic sourcing groups Ensure that the level of strategic sourcing process rigor matches the available opportunity Engage their design and engineering teams earlier in the product development cycle to drive greater savings and innovation Best in Class enterprises are 32% more likely to use advanced sourcing strategies. Their higher usage also equates to higher proficiency and superior results.

• •

Knowledge & Technology
Best in Class enterprises carefully manage critical assets like intellectual property and supporting technologies. They . . . • • Understand that successful e-sourcing programs require expertise across process, category, supply markets, and technology Show greater returns from their e-sourcing programs due in large part to their advanced sourcing capabilities, which enable them to source a wider range of categories Are more likely to invest in complementary applications and services

Strategic Sourcing Automation – No Pain, Strong Gains
In stark contrast to a streamlined e-sourcing program, the offline five-phase strategic sourcing process has numerous pain points, among them: • • • • • Identifying spend and savings opportunities Collecting supplier bids Detailed bid analysis Manual/cumbersome contracts Continuous performance improvement and measurement.

Over the past half-decade, more enterprises have begun to treat strategic sourcing as a holistic process and have undertaken plans to automate these steps and ease their pain. Let’s not forget one of the main findings of this benchmark: that e-sourcing has not fully penetrated the marketplace and opportunities for growth exist.
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Table 5: Extending E-Sourcing – Planned Investment in the Next 6 to 18 Months Technology Solution Area
Contract management Supplier performance management Optimization-based sourcing analytics e-Sourcing event management services Spend analysis e-Sourcing Strategic sourcing consulting services Strategic sourcing outsourcing services PLM (Product Design/Development/Engineering) Tools

% Selected
26% 23% 21% 19% 17% 17% 13% 10% 8%
Source: AberdeenGroup, January 2007

Advanced Sourcing Case Study: Score! Enterprise: Broadlane, a supply chain services company focused on the group purchasing in the healthcare industry Category: $26 million in I.V. pumps Strategy Employed: Team scoring for a diverse set of dispersed stakeholders Description: A need for I.V. pumps arose during a period of rising costs (due to certain pump components and an updated specifications). An advisory committee charged with requirements definition and demand forecasting developed a robust team scoring system that weighted the different clinical, technical, and financial attributes of each bidder’s pumps. The committee was comprised of nurses, pharmacists, physicians, bio-engineers and information technology specialists from each hospital to review and select the product that met the end-user's criteria for high quality, safe delivery of I.V. medications. Results: The clinical stakeholders stayed engaged throughout the entire sourcing process and were able to evaluate the bids as a team across all of the defined attributes. At the end of the process, they implemented a new contract for I.V. pumps that saved 13%. The results achieved from the team scoring and e-sourcing success allowed Broadlane to ensure that national pricing for their constituency would remain on par with the 7-yr old negotiated price and added an additional $15M in contract coverage.

Pressures, Actions, Capabilities, Enablers (PACE)
We have shown that there is a clear relationship between the pressures companies identify and the actions they take, and their subsequent competitive performance. All participants should examine their prioritized PACE selections and determine whether there are

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valuable perspectives to be gleaned by comparison with the PACE priorities of Best in Class companies. Table 6: PACE (Pressures, Actions, Capabilities, Enablers) Prioritized Pressures
Lack of formal/standard strategic sourcing and e-sourcing processes

Prioritized Actions
Standardize all sourcing methods

Prioritized Capabilities
Hire sourcing process experts

Prioritized Enablers
Leverage third party consulting expertise to develop and implement sourcing policies and procedures

Slowing momentum of cost savings/avoidance from esourcing Expertise gap

Secure executive support for sourcing initiatives Establish formal sourcing group

Expand the scope of the current esourcing program Hire proven sourcing expert to lead the organization

Grow advanced sourcing skills and apply them across a wider set of categories Leverage solution provider training programs to provide application expertise (the ‘science’) and combine with incremental sourcing expertise (the ‘art‘) gained from team experience, hiring, and/or third-party tutelage to develop sustainable advanced sourcing proficiency Reengage business stakeholders with basic e-sourcing value proposition; seek partnership early in the sourcing, requisition or design processes

Failure to engage business constituency on esourcing program

Develop shared savings program for the business that ensures some retention of overall savings.

Set performance metrics for esourcing usage and success at the business-level

Source: AberdeenGroup, January 2007

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Chapter Four: Recommendations for Action
Key Takeaways
• •

• Develop, augment or outsource process, category, supply market, and technology expertise. Establish centers of excellence for sustainable proficiency. • Employ advanced sourcing strategies across a wider set of categories. Look at complex categories, including services, logistics, T&E, and direct/strategic materials. • Focus on realized savings and correlate them to enterprise-level financial metrics (e.g., EPS).

xtending the value of an e-sourcing program requires competence, diligence, and patience. Almost every business stakeholder and category manager can explain why their categories are not a “good fit” for e-sourcing. To be clear, they are wrong. However, it should also be clear that you need their buy-in for implementation. Executive sponsorship gets them engaged the first time, while execution with the right blend of advanced sourcing strategies keeps them coming back. The gradual erosion of savings rates from e-sourcing events that we have seen over the past few years will continue. The following strategies will help enterprises maximize their returns:

E

Laggard Steps to Success
Evaluate e-sourcing applications to ensure that they offer value to the primary stakeholders. A robust solution provides visibility into sourcing activity for the executive, adequate RFx capability to meet the business needs of the category managers and sourcing specialists, a collaborative platform for the business stakeholder, and an intuitive user interface that limits or eliminates the need for supplier training. Develop a “Quick Wins” program to drive early success. Fill your pipeline with commodities that share the following characteristics: o o o o One or few stakeholders Low complexity with clearly defined specifications High spend and/or savings potential Near-term contract expiration

Promote your successes and develop a living repository of lessons learned.

Set aggressive throughput targets. Enterprises that gain sustainable e-sourcing competence generally do so through the sheer volume of e-sourcing activity - full stop. Invest significant energy in driving spend through your e-sourcing application and actively track this KPI.

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The Advanced Sourcing & Negotiation Benchmark Report

Invest more time at the front end of the sourcing process. The process efficiencies from e-sourcing really hit after your event has been launched. Invest the time you save after launching your event in front end activities like supplier discovery and developing stronger requirements.

Industry Average Steps to Success

Standardize sourcing processes across the enterprise. Process standardization does not mean doing the exact same thing in every instance. The level of rigor associated with an e-sourcing initiative should match the value associated with the opportunity. Leverage complementary technologies. Spend analysis and contract management systems are required to fully automate the strategic sourcing process. Additionally, utilize knowledge management platforms to retain process, category, and supply market intelligence. Begin developing an advanced sourcing acumen. Send staff to training sessions from solution providers and third parties. Assign super-users and allow them to identify and document best practices.

Best in Class Next Steps

Expand advanced sourcing across a wider set of categories. Target a series of complex categories and set aggressive throughput targets. Leverage technology expertise from your solution provider, other customers and your peers. Focus on realized savings. Measure realized savings and correlate them to enterprise-level financial metrics (e.g., EPS). Part of this gap can be bridged by technology. However, it is also critical to get Finance involved along with other internal stakeholders so that budget impacts can be assessed and appropriate changes (i.e., decreases) implemented. Establish centers of excellence. In order to sustain e-sourcing proficiency it is critical that sourcing acumen be institutionalized beyond a set of super-users or category experts. Utilize technology to retain and leverage intellectual property and establish an organization to be its builder and guardian.

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Featured Underwriters
This research report was made possible, in part, with the financial support of our underwriters. These individuals and organizations share Aberdeen’s vision of bringing fact based research to corporations worldwide at little or no cost. Underwriters have no editorial or research rights and the facts and analysis of this report remain an exclusive production and product of Aberdeen Group.

Located in Indianapolis, Iasta is an employee owned software and global service provider of e-Sourcing solutions. Iasta helps companies of all sizes and locations make better purchasing decisions – about the right product, the right provider at the right price. Iasta has two primary offerings; the first is its software, SmartSource™ which allows functionality such as: spend analysis, e-auctions, e-RFx, project management, contract management and advanced sourcing optimization in a self-service ASP or SaaS model. The second offering, SmartSupport™, is a mixture of services which include: global software support, fully managed reverse auctions, training and rollout programs, category management and low cost country sourcing. Iasta currently provides solutions for almost 100 clients globally. For additional information on Iasta: 11550 North Meridian St, Suite 250, Carmel, IN 46032 317-594-8600 or david.bush@iasta.com www.iasta.com

CombineNet is the advanced sourcing technology company. CombineNet’s optimizationdriven solutions deliver the absolute best total cost of goods and services based on the buying organization’s unique business needs while significantly increasing the speed and efficiency of the sourcing cycle. CombineNet’s advanced sourcing technologies have widespread application for any complex spend category. The company has extensive expertise in the sourcing of direct and indirect materials, transportation and services for CPG and Retail companies through its North American and European offices. More than 50 of the top Global 1000 companies use CombineNet for their most advanced strategic sourcing activities, with an average return on investment of more than 30x. For additional information on CombineNet: Fifteen 27th Street, Pittsburgh, PA 15222 (412) 471-8200 or info@combinenet.com www.combinenet.com

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The Advanced Sourcing & Negotiation Benchmark Report

Founded in 1972, SAP is the recognized leader in providing collaborative business solutions for all types of industries and for every major market. Serving more than 32,000 customers worldwide, SAP is the world's largest business software company and the world's third-largest independent software provider overall. We have a rich history of innovation and growth that has made us a true industry leader. Today, SAP employs more than 35,000 people in more than 50 countries. Our professionals are dedicated to providing the highest level of customer service and support. For additional information on SAP: 3999 West Chester Pike, Newtown Square, PA 19073 1-610-661-1000 www.sap.com

Verticalnet is a leader in end-to-end Supply Management solutions available On Demand. With the Verticalnet XE Supply Management suite, large enterprises and mid market customers can now have powerful On Demand access to the complete supply management process from spend analysis to sourcing, sourcing to contract and procurement with a comprehensive approach to compliance and supplier performance monitoring. Verticalnet Supply Management solutions provide the visibility, insight, and process control required to maximize sustained value realization with an optimal blend of software, comprehensive services, deep category knowledge, and domain expertise. For additional information on Verticalnet:
400 Chester Field Parkway, Malvern, PA 19355 1-610-240-0600 or info@verticalnet.com

www.verticalnet.com

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UGS is a leading global provider of product lifecycle management (PLM) software and services with nearly 4 million licensed seats and 46,000 customers worldwide. Headquartered in Plano, Texas, UGS’ vision is to enable a world where organizations and their partners collaborate through global innovation networks to deliver world-class products and services while leveraging UGS’ solutions, fulfilling the mission of enabling them to transform their process of innovation. With UGS Teamcenter for SRM, an integrated web-based solution that transforms strategic sourcing, companies can engage their entire supply chain in a collaborative environment that supports cost management throughout the product lifecycle process. For additional information on UGS: 5800 Granite Parkway, Suite 600, Plano, TX 75024 1-972-987-3000 or info@ugs.com http://www.ugs.com/products/teamcenter/sol_prod/srm/

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The Advanced Sourcing & Negotiation Benchmark Report

Author Profiles
Andrew Bartolini, Research Director Global Supply Management AberdeenGroup, Inc.
Andrew Bartolini is a supply management professional with rich experience in strategic sourcing, business process transformation, and software implementation. He has managed the design and implementation of strategic sourcing and procurement processes for companies across a wide range of industries and has directed strategic sourcing projects exceeding $500 million in total value. His recent focus has been in identifying and leveraging world-class technologies to achieve operational excellence within the procurement and finance functions of Fortune 500 companies. His background also includes extensive transactional and analytical experience while working in management consulting and investment banking. He joins Aberdeen from Ariba, where he was a Senior Manager in its Consulting Practice. He holds a B.A. in Economics from Holy Cross College and an M.B.A in Finance from Indiana University.

Vance Checketts, Channel Director Global Supply Management AberdeenGroup, Inc.
Vance Checketts is a recognized expert in the areas of procurement and supply management with a deep background in the application of technology and the underlying business process. Prior to Aberdeen he was at Oracle where he was responsible for the development and sales support of their procurement applications. Prior to Oracle, he held senior roles managing direct and indirect procurement. He has lectured and published with various industry organizations, including IFPSM, ISM, and Haas School of Business at UC Berkeley. He holds an M.B.A. from Brigham Young University. He oversees and contributes across the entire scope of Aberdeen’s Global Supply Management research team.

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The Advanced Sourcing & Negotiation Benchmark Report

Appendix A: Research Methodology

I

n January 2007 , AberdeenGroup benchmarked the Sourcing strategies, experiences, and intentions of over 160 enterprises across multiple industries and geographies.

Responding supply management executives completed an online survey that included questions designed to determine the following: • • • • The maturity and scope of sourcing programs and an understanding of how these programs fit within broader supply management initiatives The benefits that have been derived from e-sourcing programs and technologies The application and results of specific sourcing strategies The current and planned use of related supply management technologies

Aberdeen supplemented its online survey effort with telephone interviews with select survey respondents, gathering additional information on sourcing strategies, experiences, and results. By focusing on the above topics, this study aims to identify best practices and strategies of top-performing sourcing programs and to provide a basic framework for quantifying the success of eSourcing initiatives by estimating the operational and financial impact of adopting such practices. Figure 5 describes the maturity and scope of the e-procurement deployments participating in this benchmark.

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The Advanced Sourcing & Negotiation Benchmark Report

Figure 5: Maturity of E-Sourcing Initiatives in Benchmark Report

11%

11%
In use for less than one year In use for 1 to 2 years In use for 2 to 3 years In use for more than 3 years Have purchased, but not in use Not in use - plan to deploy within 12 months No plans to purchase or deploy

13% 21%

12% 4%

29%
Source: AberdeenGroup, January 2007

Enterprises participating in the benchmark included the following attributes: • Industry: Respondents from 32 distinct industries are represented in this report. Financial services and the public sector represented 9% and 8% of the sample, respectively. 26 industries each accounted for between 4% and 7% of the survey sample. These sectors included construction/engineering firms, high technology/software, publishing/media, pharmaceutical aerospace/defense, consumer packaged goods, chemicals, consumer electronics, metals/mining/oil/gas, retail, telecommunications, manufacturing, and transportation/logistics. Geography: Fifty-five percent of benchmark participants were from North America. Twenty-five percent of participants were from Europe; 13% were from the Asia-Pacific region; 4% were from Latin and South America; and 3% were from the Middle East and Africa. Company size: Fifty-eight percent of respondents were from large enterprises (annual revenues above US $1 billion); 26% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 16% of respondents were from small businesses (annual revenues of $50 million or less). Job title The research sample included respondents with the following job titles: CPO, CFO, or other C-level officer (10%); SVP or VP-Level (9%); Director (23%); and Manager (40%) Function: The research sample included respondents from the following functional areas: procurement, supply chain, and logistics (76%); Business Process Management (9%); IT (4%); and Sales (8%).

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Solution providers recognized as sponsors of this report had no substantive influence on the production of The Advanced Sourcing and Negotiation Benchmark Report. Their sponsorship has made it possible for AberdeenGroup to make these findings available to readers at no charge. Table 7: PACE Framework PACE Key
Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product/service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products/services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)

Source: AberdeenGroup, January 2007

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The Advanced Sourcing & Negotiation Benchmark Report

Table 8: Relationship between PACE and Competitive Framework PACE and Competitive Framework How They Interact
Aberdeen research indicates that companies that identify the most impactful pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute.
Source: AberdeenGroup, January 2007

Table 9: Competitive Framework Competitive Framework Key
The Aberdeen Competitive Framework defines enterprises as falling into one of the three following levels of e-procurement practices and performance: Best in Class (20%) — E-Procurement practices that are the best currently being employed and significantly superior to the industry norm, and result in the top industry performance. Industry norm (50%) — E-Procurement practices that represent the average or norm, and result in average industry performance. Laggards (30%) — E-Procurement practices that are significantly behind the average of the industry, and result in below average performance

Source: AberdeenGroup, January 2007

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Appendix B: Related Aberdeen Research & Tools
Related Aberdeen research that forms a companion or reference to this report include: • • • • • • The CPO’s Strategic Agenda: Managing People Managing Spend (November 2006) The Spend Intelligence Benchmark Report (June 2006) The Contract Management Benchmark Report: Procurement Contracts (March 2006) The Direct Materials Sourcing Benchmark (March 2006) Success Strategies in Advanced Sourcing and Negotiation (June, 2005) CFO’s View of Procurement: Getting More to the Bottom Line (September 2005)

Information on these and any other Aberdeen publications can be found at www.Aberdeen.com.

Aberdeen’s 2007 Global Supply Management Research Agenda is also available.

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AberdeenGroup, Inc. 260 Franklin Street, Suite 1700 Boston, Massachusetts 02110-3112 USA Telephone: 617 723 7890 Fax: 617 723 7897 www.aberdeen.com © 2007 AberdeenGroup, Inc. All rights reserved January 2007

Founded in 1988, AberdeenGroup is the technologydriven research destination of choice for the global business executive. AberdeenGroup has over 100,000 research members in over 36 countries around the world that both participate in and direct the most comprehensive technology-driven value chain research in the market. Through its continued fact-based research, benchmarking, and actionable analysis, AberdeenGroup offers global business and technology executives a unique mix of actionable research, KPIs, tools, and services.

The information contained in this publication has been obtained from sources Aberdeen believes to be reliable, but is not guaranteed by Aberdeen. Aberdeen publications reflect the analyst’s judgment at the time and are subject to change without notice. The trademarks and registered trademarks of the corporations mentioned in this publication are the property of their respective holders.

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