"Most procurement experts believe 15-20% of purchased materials and services can be saved (billions of dollars in a large company) by centralizing procurement and leveraging a far-flung corporation's buying power. Despite this expert opinion, backed by numerous examples, many medium and large companies maintain decentralized, splintered, uncoordinated procurement operations."
Gene Richter, former Chief Procurement Officer at IBM
While every business needs to track the purchase of goods and services, many small and midsize businesses (SMBs) have been discouraged from using centralized software solutions due to high up-front licensing fees, expensive implementations, and the level of organizational training necessary to get the full value out of an enterprise-class procurement solution. This article provides an overview of the benefits provided by e-procurement solutions, then introduces the first open source e-procurement software and the business model for the company behind the open source project.
Why Automate Purchasing?
The purchase of goods and services is often a time-consuming process for companies. The situation can be worse for SMBs who can't justify the cost of software to consolidate all purchasing avenues. For these businesses, the purchasing process involves manual procedures which are often rife with mistakes and delays.
In terms of scope, the end-to-end procurement process starts with identification of need, usually in the form of a requisition. From there you may need to issue an RFP (request for proposal), which is answered with a supplier quote, turned into a contract, and issued as a PO (purchase order). The process continues until the enterprise issues payment to the vendor. There can be a lot of complexity in each of the transactional steps.
Enterprises, who can afford to do so, use procurement systems to centrally manage the purchase of goods and services needed to run the business. A rule of thumb is that these systems, when implemented correctly, can save approximately 15% of a company's annual spend. A part of the savings is "hard savings", that is, reduced prices paid or cost avoidance. Another piece is "soft savings", as these systems can dramatically improve operating efficiency. They also tend to reduce the risk of fraud and other forms of corporate abuse.
The e-procurement concept, introduced in the late 1990's, centers around a browser-based self-service buying portal. Employees have easy access to corporate contracts, and the system takes care of things like pre-approval, auto-generation of POs, and communication with suppliers. This empowers individual employees to request goods and services and dramatically reduces the manual labour required of clerical staff. Employee requests go through an email-based approval process, further streamlining corporate oversight. Study after study prove the effectiveness of these systems, including a 2007 research report from Aberdeen. Aberdeen surveyed over 600 firms who invested in automated purchasing, and found that these systems enabled them to:
- slash order cycle times by 84%
- slash order processing costs by 59%
- slash uncontrolled spending by 40%
E-procurement automates and optimizes the entire procure-to-pay process. From requisitioning, approvals, and purchase order creation to RFQs (request for quotations), receiving, inventory, and invoicing, manual steps are minimized. Email and the web replace phones and fax machines. It's clearly a more efficient way for businesses to buy the goods and services they need.
Why Hasn't Every Business Automated Purchasing?
Because automating purchasing makes common sense, you may be surprised to learn that e-procurement is not a widely adopted tool by today's businesses. The simple reason automated purchasing systems aren't more prevalent is that they are extremely expensive to purchase, and cost even more to own and operate. In addition, SMBs don't necessarily need a solution with extensive bells and whistles and may prefer a straightforward user interface with easily configurable functionality.
When e-procurement first emerged as an enterprise software category in 1996, it became an instant success with the Fortune 500. After all, these companies spend the most money and have the most waste. So, even though the software could cost up to five million dollars to license and another ten million to get up and running, it still paid for itself long-term.
I was personally involved with e-procurement projects at General Electric, Alcoa, NCR, Citibank, and many other well-known firms. Even in the early days, these firms succeeded in gaining greater control over their spending while dramatically reducing their G&A (general and administrative) expense costs. Even though the software was buggy, hard to use, overly complex, and expensive, they eventually reaped the financial gains. Naturally, beyond the Fortune 500, an automated purchasing system was just a pipe dream. Systems were too expensive and implementation costs were too high. Also of import, systems were hard to use without extensive training, which added to their cost. The risk associated with taking on an e-procurement project just wasn't worth the reward. And so, the nascent e-procurement software category was viewed as exclusively for the Fortune 500.
Open Source Changes The Game
Not surprisingly, the underlying technology used to create automated purchasing systems has improved since 1996, with open source playing a big role. Rock-solid open source operating systems like Linux, technology stacks such as Apache and MySQL, and a host of application frameworks like PHP, Python, Java, and Ruby on Rails have matured into high-quality open source components. These components dramatically reduced the investment required to create enterprise-class software. And we've seen the results across a number of enterprise software categories, including CRM (customer relationship management), HR (human resources), procurement, and even core financials.
Coupa is a case in point. Formed in February 2006, a 100% open source stack was used to build the first freely downloadable e-procurement system, Coupa e-Procurement Express. We were able to deliver the initial version after just five months of development. Two years later, we have improved the code countless times, issued many major updates and releases, and have surpassed 12,500 downloads on Sourceforge alone. In large part because of today's open source tools, we've broken through the Fortune 500 barrier to deliver an automated purchasing system truly accessible to emerging, smaller companies.
While open source components fundamentally lowered the R&D (research and development) investment required to create an automated purchasing platform, companies were still faced with a lengthy on-premise implementation to get the software up and running. Most companies don't have the time or the resources to dedicate to the traditional 20th century on-premise software implementation. After all, there's hardware to acquire, software to install, and ongoing maintenance to consider.
So we turned to SaaS (software as a service) as a way to provide added value to our open source e-procurement platform. The SaaS delivery architecture enables companies to automate purchasing without taxing their IT (information technology) team. This eliminates the need to buy and install hardware, software, and middleware anywhere within the company. The only requirement is a browser.
Coupa's business model is to expand and enhance the Coupa e-Procurement Express open source project into a packaged solution available via SaaS. Annual subscriptions start at $3,495 USD and, in addition to the delivery platform, include updates, maintenance, backups, and monitoring.
Once Coupa made e-procurement software accessible via open source and an optional on-demand delivery model, it didn't take very long for the success stories to start rolling in. We were immediately surprised by the variety and size of the businesses attracted to the solution.We originally suspected that companies with fewer than 100 employees would keep their manual procedures. Instead, firms with as few as twelve employees have subscribed to Coupa e-Procurement. We have heard from CEOs of startups that "it just makes sense to do things right from the beginning". Even Fortune 500 firms have expressed an interest in looking for a simple and quick way to improve their purchasing processes.
Success has been seen across different sized and very different types of companies. We've seen Coupa e-Procurement help keep R&D on track for biotechs. Retailers also look to Coupa to help them efficiently run centralized procurement for their non-merchandising spend. Non-profits, engineering and construction firms, legal firms, and even high tech manufacturers use our software as a better way to buy.
What Will The Future Hold?
In our personal lives, the way we buy has been transformed by the web. We buy online for convenience, to get access to products we couldn't otherwise obtain, and to research the best prices.
Ironically, businesses have failed to transform in the same fashion. The way businesses buy goods and services isn't all that different than 10, 20, or even 30 years ago. Coupa's goal is to leverage open source to affect a transformation so that business can implement a system that helps employees buy what they need conveniently and quickly, yet still keeps finances in control and on track.