Managing spending and e-sourcing
Posted by egovindia on August 5, 2006
Managing spending and e-sourcing
With Corporate Governance being considered a key issue by organisations, Spend Management and e-sourcing are on top of their lists, finds Faiz Askari.
Corporate Governance looks at the institutional and policy framework for corporations—from their inception, formulation of governance structures, company law, privatisation, to market exit and insolvency. However, the concept of Corporate Governance is poorly defined because it potentially covers a large number of distinct economic phenomena. As a result different people have come up with different definitions that basically reflect their own interests in the field.
“By enabling businesses to automate key steps of the Spend Management process in a single, closed-loop system, an
SM solution provides
operational control to manage the spend”
– T Sivakumar
Group Director, Asia-South Ariba
According to T Sivakumar, Group Director, Asia-South, Ariba, “With the passing of guidelines such as Sarbanes-Oxley in the US and the elevation of Corporate Governance as a key business issue across the globe (post-Enron and Worldcom), it has acquired the public spotlight raising fundamental questions on the existing corporate systems and processes, and good governance.”
“As the awareness
on HR rights and practices has increased, there has been pressure
on organisations to inculcate good Corporate Governance practices”
– Prasad Rajappan
Prasad Rajappan, MD, Cnergies believes that there are domestic factors driving Corporate Governance in various industry segments. He elaborates, “As the awareness on HR rights and practices has increased there has been pressure on organisations to inculcate good Corporate Governance practices. Cases like employees who have resigned not getting their dues in time, or delays in getting the retiral benefit accounts of former employees transferred are now escalated right up to the top management. Going to the media and even the police for such cases, which was earlier seen by the corporates as trivial, has become a serious issue now.”
He adds, “A CFO of a large bank approached us for a solution that could handle grievances of ex-employees. Another large customer wanted a help-desk to be set up to handle such cases. For all these organisations, help from third-party service providers is sought to ensure better adherence.”
Sivakumar has a different view, “Corporate Governance is not solely about regulatory or structural remedies. Fundamentally it’s about work culture and practices that provide a common understanding of the roles of management and the board in adopting best practices. With 60 to 90 percent of revenues contributing to the cost of goods purchased, it has become critical for organisations to adopt efficient Spend Management (SM) techniques or procurement to ensure compliance standards in purchasing.”
Dynamic global and local economic conditions continuously challenge and shape business priorities. Though businesses cannot control the economic conditions in which they operate, they can control their spending. As all the money saved goes to the bottom-line, managing spending allows companies to remain competitive in all economic cycles. Effective management of spend—what am I spending on, with whom, and at what price— enables companies to ensure that expenses fall faster than revenue in a weak economy and increase at a slower rate than revenue in a strong economy. This is what SM is all about.
“Most companies today understand the need to manage their spend, but face challenges in terms of reducing costs, increasing savings and bringing efficiency with transparency within the system. This has resulted in lot of pressure on the CXOs across the world. The key is to identify the areas, develop strategy to reduce costs and then systematically manage all key purchasing interactions across the enterprise to deliver the targeted spend reductions,” says Sivakumar.
However, there hasn’t been a single system that addressed the full cycle of procurement, until the evolution of Spend Management. For companies to achieve the desired results, it is critical to recognise SM as a single, focussed process that must be implemented consistently across the enterprise. When spend is treated in a fragmented manner, organisations find it difficult or impossible to streamline procurement and fully manage it.
Explains Sivakumar, “By enabling businesses to automate key steps of the SM process in a single, closed-loop system, an SM solution provides enterprise-wide visibility and operational control required to fully manage and leverage the spend. As a result, financial, sourcing, and procurement professionals can deliver and sustain significant spend reductions that improve the bottom line.”
Rajappan opines: “In today’s knowledge economy human spend has become not only critical but a driver for growth and success.” However traditionally SM was associated with procurement of goods and sometimes services. With the advent of skills-based and service-oriented organisations wherein the major spend is on human resources, SM is referred to as the human capital cycle.
A critical role
SM is all about a new category of solutions that is designed to enhance a company’s sourcing and procurement strategy. By allowing companies to combine their analysis, sourcing, contracting, procuring, and reconciling processes into a single and cohesive system, this solution can provide closer visibility over the spend. SM helps companies to efficiently manage purchasing functions, thereby gain a competitive advantage and bolster the bottom line.
“Spend Management is the only integrated set of solutions that allows companies to manage their full spend lifecycle from planning to payment. The solutions comprise analysis, sourcing and procurement. With the help of this solution companies can identify where and how they can keep saving money and ensure maximum profit,” says Sivakumar.
Rajappan gives a specific example, “If one analyses the total Spend Management in the HR process; recruitment, screening, selection, induction, training, compensation and benefits management, appraisal and reward, parting ways, career planning and so on, managing costs at each of these nodes is a challenge.”
“Spend Management has a high importance level due to the increasing complexity that we have in managing these processes. Let us consider recruitment. On the surface, it appears that recruitment has become easy because of the number of recruitment companies, job portals and technological advances. But if one goes beneath, it will be surprising how the manpower churn is impacting the total spend. Many a times these are a staggering 3X times than what is apparent.” says Rajappan.
As the demand for paper-less offices and business transactions is growing, companies are continuing their advancements in Corporate Governance. Apart from Spend Management, e-sourcing is another area which is attracting corporate houses and businesses.
Rajappan says, “e-sourcing in the area of HR has already been exploited. After online recruitment, the trend will be towards having an HR Exchange wherein a human talent pool will be available for scouting and fitting into appropriate roles. It will be not long when all of us in the job market will have our online human valuation across multiple perspectives. We will have large agencies getting into the act of valuing human capabilities looking at the market needs. There will be enough work but regular jobs will be less. Human value will get more returns and in turn organisations will get value for money.”
The advantages of e-sourcing are as follows:
Process efficiencies: It reduces the tendering and contract management time and effort for both buyers and suppliers.
Improved public sector savings: It helps public sector procurement professionals to focus on core, value-added procurement activity rather than administration.
Policy: It helps users to ensure compliance with the requirements of the Efficiency Review and the National Procurement Strategy for Local Government.
Best practices: It encourages users to adopt best practice in procurement, and enable a consistent approach to sourcing.
Collaboration and aggregation: It makes it easier for public sector procurement professionals to work collaboratively on common sourcing projects across geographically dispersed units and different departments.
Direct costs for buyers and suppliers: It reduces the direct costs of preparing and issuing the Invitation To Tender (ITT) and responding with tenders. Direct costs include paper, printing and distribution costs. Collaborative working reduces the need for teams to travel for face to face meetings.
e-sourcing can be further defined as a suite of collaborative Web-based tools that enable procurement professionals and suppliers to conduct strategic activities within the procurement lifecycle over the Internet. These strategic activities including requirements and specification definition, tendering and supplier selection, and contract award and management are designed to deliver value-for-money procurement solutions to the public sector.
The Indian connection
Sivakumar says, “Indian enterprises have been successful in the adoption of e-sourcing that enabled them reduce costs, improve bottom-line, and bring transparency and efficiency in their purchasing functions. In recent times, the Indian market has witnessed a total sourcing volume worth Rs 25,000 crore across various sectors. Ariba has been at the forefront with a contribution of sourcing transactions worth Rs 15,000 crore. Some of the companies who have benefitted by the adoption of e-sourcing initiatives in India are Tata Motors, Dabur, Crompton Greaves, Indo Rama, Ranbaxy and TVS.”
He adds that the move towards SM begins with the adoption of e-sourcing solutions. Most Indian enterprises are today sourcing materials and services with the help of these solutions. The next step for these enterprises would be to implement upgraded e-procurement solutions that bring in a higher level of efficiency through cost reduction and transparency. Sourcing and procurement together help enterprises to complete the full cycle of SM whereby sourcing (upstream) provides an automated platform and procurement (downstream) ensures compliance of purchasing functions across departments and business functions.
Sivakumar adds, “Most enterprises across industries such as textiles, retail, manufacturing, FMCG, pharmaceuticals and automobiles have seen huge potential in e-sourcing and are now likely to move up the value chain with SM. Dabur and Crompton Greaves are among the companies that are seriously looking at Spend Management. They are considering adopting Ariba’s Spend Visibility solution to manage their procurement functions.”
Rajappan says, “Corporate Governance till recently was restricted to large corporate houses. With the changing business environment and stakeholder awareness, more organisations are trying to get into these initiatives.”
He adds, “The concept of Corporate Governance has gained importance in many areas of business. Earlier, outsourcing was considered improper specifically because of data confidentiality apprehensions. But this trend is now reversing as organisations see this as a reason for outsourcing. Third party service providers seem to be a better bet to ensure data confidentiality.”
In addition, the expanding canvas of e-governance in India is a major factor that is pushing the growth of Corporate Governance. “The growing number of e-governance projects in India are good signs of Corporate Governance. After all, e-gov is the big picture of Corporate Governance,” says Sivakumar.
Enterprises globally have realised the need to upgrade their legacy systems that fail to provide a solution that is uniform. As companies seek to automate and optimise new business processes, a common view is that an existing solution such as ERP and CRM should be extended to meet these new challenges.
Rajappan says, “As it is getting difficult to attract the talent pool, it is becoming imperative for organisations to adopt Corporate Governance solutions. Especially in the aftermath of a few BPO cases in which customer-sensitive information was misused by some employees for their personal gains, organisations dealing with foreign clients or partners are eager to get Corporate Governance solutions implemented.”
The list of target segments includes BPO, government, manufacturing, IT and retail.
Even mid-sized companies are adopting Corporate Governance. Rajappan says, “There has been an increasing trend among mid-sized companies for Corporate Governance. Adopting a Sarbanes-Oxley compliant system and processes is the new trend. Financial fraud reporting tools are gaining importance.”
Sivakumar comments, “To compete with global companies, we have to fulfil global requirements. For these standardised requirements small-and mid-sized businesses are showing interest in implementing Corporate Governance practices.”
However according to industry estimates, enterprises globally are realising that Spend Management will allow companies to integrate a process and collaboration that goes across departments and companies. One financial services organisation is using a Spend Management deployment to enable frontline employees to better manage and schedule transportation services within specific geographic regions. This deployment has helped curb unauthorised spending while improving compliance through Web-based tools accessible to the procurement organisation, frontline users, and suppliers.
“As procurement teams begin to take category-specific approaches to track and manage spending across an organisation, they often find a wealth of information and knowledge that was previously scattered across the company’s systems and operating units if it was tracked at all. For one organisation, this analysis showed that different operating units of a company were purchasing the same type of IT consulting services from the same vendor at hourly rates that differed by 40 percent.” Sivakumar says.
He adds, “With large Fortune 500 corporations and governments across the globe wanting to stay ahead of their competitors, SM is expected to witness huge adoption in the coming years. Some of the global companies which have already adopted SM include the BMW Group, Fedex Corporation, Hewlett Packard and Volkswagen.”
With all the opportunities in the Indian corporate sector, globalisation and expanding reach of e-governance, Corporate Governance solutions seem to have a great future in India. Rajappan concludes, “With the digital divide between nations and organisations narrowing, Corporate Governance is getting prominence.”