Detecon Executive Briefing

Procurement Process &

Application Strategy
IT-savvy CPOs are more
successful
Procurement leaders manage their IT systems. Leading
purchasing organizations systematically exploit the benefits
of innovative procurement applications to the full and are
equipped with a goal-oriented, strategically aligned process
and application landscape.

Chief procurement officers (CPOs) who do not understand

IT as a critical success factor allow their purchasing systems
to be managed from the outside by finance and controlling,
the business departments, or the IT department. But if they
are to meet rising efficiency and value contribution targets
sustainably, they must ensure that procurement defines its
core processes itself and, in close cooperation with IT,
comes up with the strategically best-fitting target application
landscape to drive forward the transformation without loss of
consistency.

Large, cross-functional process optimization programs of the

type “demand-to-pay” are alluring from a methodological
standpoint, but in actual practice they frequently have a
paralyzing effect. Maintaining the indispensable autonomy in
the design of purchasing and securing its embedding in the
overall process and application architecture becomes
possible with the aid of a service-oriented encapsulation of
the purchasing processes and systems.

We make ICT strategies work

 Detecon Executive Briefing

Strategic significance of procurement applications

Over the past decade, the role and importance as well as the working methods of purchasing
have changed fundamentally; the consistent IT support of both operative and strategic
procurement processes has played a decisive role here. The procure-to-pay (P2P) process
is more or less inconceivable without IT, but the source-to-contract (S2C) and the strategic
supplier and material group management without the support of state-of-the-art applications
are far removed from best practice.

Procurement applications are a major success factor and strategic enabler for mastering
long-term the steadily rising challenges facing purchasing directors with respect to efficiency
and value contribution. In the end, CPOs cannot solve the challenge of “doing more with
less” without state-of-the-art processes and applications.

This may come as a surprise because CPOs are usually dissatisfied with their procurement
applications and view IT less as an enabler and more as an obstacle. Their complaints
concern poor purchasing reporting, bad data quality, meager support of strategic purchasing
professionals, high expenditures of manual work, dissatisfaction of the users, system
heterogeneity, and inadequate flexibility.

Case Study 1:
While many purchasing organizations have resigned and accepted unsatisfactory
purchasing systems, procurement leaders prove that this is not a law of nature. For
example, one utility corporation has consistently consolidated and standardized its
heterogeneous procurement application landscape, including master data management,
throughout the group. The operative procurement processes are largely automated and
the strategic purchasers are supported by business intelligence which actually deserves to
be called such. The procurement system landscape is “designed for change” so that
organizational units can be quickly integrated (M&A) or divested (carve-out). Clear targets
and persistence in the implementation were the success factors.

Process-oriented application clusters

Procurement applications are characterized by a relatively high level of complexity because,
like a spider sitting in the middle of its web, they are connected or integrated with a broad
diversity of internal units and external suppliers. Usually procurement applications support
continuous end-to-end processes which go beyond the core processes of procurement itself.

So self-service e-procurement solutions always include the requisition and approval process,
too. The purchasing process does not end with the order; it is not finished until payment,
including the reconciliation of the order, goods receipt, and invoice (three-way matching),
has been effected. Similarly, sourcing begins right from target costing and budget planning,
not with the later concrete requisition.

Detecon International GmbH  11/2010 2 www.detecon.com

 Detecon Executive Briefing

Focusing on definite procurement application clusters has proven to be an effective method

for handling this complexity. The figure below shows the Detecon reference model “Supply
Management Processes and Applications”, which distinguishes between twelve different
application clusters. Detecon has examined both the market of solution providers and has
documented best practices of leading procurement organizations for each of these
application clusters.

Strategic Sourcing Operational Procurement (P2P) Purchasing Support

Contract Call-off & Receiving & Controlling & Content &

Supplier Mgmt Sourcing Requisition
Mgmt Purch. Order Payment Reporting Master Data

eSourcing, Rfx Catalog Spend Analysis Catalog

and Auction Tools Engines & Compliance Content

Supplier Mgmt Self-service eProcurement Business

Solutions Solutions Intelligence

Contract Mgmt Services Procurement

Solutions Solutions

Direct / Plan-driven
SCM Solutions

ERP Backend Systems Master

(Supply Mgmt Modules) Data Mgmt

Portals, Collaboration and Integration Solutions

(not specific for Supply Management)

Figure 1: Detecon Reference Model “Supply Management Processes and Applications”

Solution provider market and fields of innovation

The solution providers can be roughly divided into three groups: ERP solution providers,
best-of-breed specialists, and local niche providers. Moreover, legacy systems and custom
developments are still relatively common in procurement, but they are seldom justifiable from
a business viewpoint.

Leading ERP providers such as SAP and Oracle offer a standard solution for all twelve
application clusters, thus allowing in principle for a single vendor procurement application
landscape. By their nature, the strength of the ERP solution providers is in the operative P2P
process, while the best-of-breed providers who have specialized in a limited number of
application clusters still have the lead with regards to the strategic procurement processes.

Innovation pressure is not only created by the best-of-breed providers, but lately also by the
ERP solution providers, who are successively closing remaining functional gaps. Current
innovation fields include contract management, service procurement, supply base
management, and new approaches in procurement data quality management.

Detecon International GmbH  11/2010 3 www.detecon.com

 Detecon Executive Briefing

Case Study 2:
Following a long drought period, SAP offers with the release of SRM 7.0 quite a promising
procurement solution. Its extended functional scope goes far beyond simple catalog-based
e-procurement. However, purchasing departments should not be bedazzled by the new
features, but should assess their business value and strategic potential. For example, the
new SRM 7.0 feature of “central contracts” represents a strategic value add only if a
central procurement organization works in many ERP backend systems and has
crossover frame agreements in place. In this constellation SAP SRM 7.0 is a strategic
enabler driving forward the centralization strategy.

Procurement systems excellence

Case Study 3:
Excellence is not only evidenced by the implementation of innovative solutions, but also by
the consistent and full usage of existing procurement applications. A telecommunications
corporation has achieved a catalog ratio of more than 60%, while many companies never
go any farther than office supplies when applying e-procurement. The applications are the
same! But astonishing improvements in efficiency are still possible even for office
supplies. This corporation came to an agreement with its auditor that for some defined
“low-value” material groups it is no longer necessary to book goods receipt manually. As a
consequence, the substantial clarification effort caused by missing goods receipt postings
was eliminated.

An “ideal” process and application landscape which is generally suitable for everyone cannot
be defined; the concept must always be drawn up individually, taking into account the
specific context, conditions and procurement strategy. Nevertheless, it is possible to define
criteria for maturity levels and universal characteristics of excellent procurement process and
application landscapes:

Procurement strategy alignment and innovation IT-empowered procurement processes

 Alignment of the purchasing processes and  Standardized procurement processes and

applications with the purchasing strategy applications group-wide
 Specific use of innovative purchasing solutions  Complete integrated IT support for all
with strategic added value procurement processes
 Final control of purchasing and of the Procurement  Harmonization: minimization of process
purchasing processes and systems variants specific to material groups
 Prioritization of the transformation systems  Service-oriented process encapsulation
steps in conformity with the strategy excellence

 Flexible and agile purchasing system architecture

 Uniform standard purchasing systems throughout the group
and minimization of special solutions and redundancies
 Service-oriented encapsulation of purchasing functions
 Rigorous governance based on business case observation

IT-Architecture & Total Cost of Ownership (TCO)

Figure 2: Characteristics of Procurement Systems Excellence

Detecon International GmbH  11/2010 4 www.detecon.com

 Detecon Executive Briefing

Case Study 4:
The purchasing department of a global communications company has been organized
according to its commodity structure. The commodity managers were given extensive
authority to realize their challenging targets. This freedom resulted in a large number of
innovative ideas, but also in myriad process variants and solutions. For example, several
service procurement solutions which could have been realized with a single application
were implemented. This example shows that a crossover governance of procurement
processes and applications should not be neglected.

Successful transformation

Since the target state can be described quite well, the question arises as to how
procurement systems excellence can be achieved and why so many fail. The following
straightforward procedure has proven itself:

Define target land- Prioritize

Analyze current Be determined in
scape for the pur- transformation steps
situation and strategic moving ahead with
chasing processes and draw up road
goals the transformation
and systems map

Upon completion of the analysis phase, the purchasing department must clearly define its
area of process responsibility and – as necessary – take firm command of the process
ownership. If the procurement department does not stake out a strong position here, the
procurement processes and applications will be defined by finance and controlling, the
business departments, or the IT department. But then it would be pure luck if the purchasing
department’s requirements were given adequate consideration.

It is essential for the procurement department to design its core processes itself and, acting
jointly with the IT department, to define the best-fitting target application for these processes.
The specified target process and application landscape must be decided formally on top
management level. Keeping this approved target picture in mind, the transformation steps
are defined, prioritized and planned in a road map while costs and benefits are constantly
considered. Finally, persistence is “all” that is required during implementation.

Large, cross-functional process optimization programs such as the end-to-end optimization

of the demand-to-pay process are a two-edged sword. The objective is the master stroke
which eliminates all pain points at once and results in an overall optimum. But such success
cannot be achieved unless all of the involved stakeholders and departments pull together
over the long run. Unfortunately, practice shows that all too often such highly ambitious
initiatives fail or progress much too slowly.

Detecon International GmbH  11/2010 5 www.detecon.com

 Detecon Executive Briefing

Case Study 5:
The example of two manufacturing corporations will make this clear: while the purchasing
organization of the one manufacturer consistently and on its own authority designed its
procurement processes and applications itself and successfully optimized them step by
step, the second manufacturer chose the path of a cross-departmental optimization
program comprising finances, controlling, and purchasing. Despite a textbook end-to-end
approach in terms of methodology, the optimization program “got stuck” during the
concept phase. The optimization of the procurement processes and applications did not
make any progress until the overall program was broken down into manageable, agile
transformation blocks and the high-flying expectations were lowered.

The consequence is that purchasing departments are well advised to drive forward their
transformation on their own and not to wait for the miracle of a crossover optimization
program. The guideline of an overall, end-to-end process and application architecture in
which the service-oriented encapsulated procurement processes and applications can be
embedded has proven to be successful. This approach assures continuous processes, is
tolerant of differing transformation speeds, and preserves the procurement department’s
design autonomy.

Case Study 6:
Despite its heterogeneous ERP system landscape, an automotive supplier succeeded in
managing the requisition-to-order process exclusively via a central SAP SRM hub. In the
sense of a service-oriented approach, the SRM hub provides the requisition-to-order
process as a service. This service is called from all ERP systems. All requisitions and
purchase orders are centrally managed in the SRM hub, irrespective of its ERP origin.
This centralization and process encapsulation also enabled business process outsourcing.
All of the purchase orders for non-critical material groups and below a certain value
threshold are handled by a nearshore service provider.

Detecon International GmbH  11/2010 6 www.detecon.com

 Detecon Executive Briefing

Procurement leaders manage their IT systems

In summary, it can be stated that an optimized, best practice procurement process and
application landscape is a strategic asset which enables the purchasing department to
achieve its challenging objectives sustainably. Conversely, inadequate procurement
applications are a permanent strategic burden preventing procurement excellence.

CPOs who do not understand IT as a critical success factor and do not consider the
continuous optimization of the procurement process and applications as one of their key task
are less successful and may even be doomed to failure in the end. It is becoming
increasingly difficult to meet the growing challenges and to master the increasing complexity
of purchasing when using inadequate applications. The gap to excellence grows inexorably.

Of course, CPOs need not be concerned with system details, but procurement processes
and applications must be tightly enshrined in their management agenda. CPOs must ensure
that their organization takes control of the design and determinedly drive forward the
transformation towards the defined target procurement process and application landscape in
alignment with the procurement strategy. To put it briefly: procurement leaders manage their
IT systems.

The author

Felix Theisinger
Felix.Theisinger@detecon.com

Detecon International GmbH  11/2010 7 www.detecon.com