The Business Casefor eSourcingA side-by-side activity-based cost comparison ofmanual strategic sourcing versus eSourcing forbusinesses.
Introduction ContentsJust how much does your manual strategic sourcing process cost The company ...................................................................................... 4your enterprise each year in terms of...? The sourcing project ............................................................................. 5• ...labor/manhours• ...sourcing cycle time The procurement team & key stakeholders ............................................... 6-7• ...missed cost savings (due to less-than-perfect competition) Process, time and cost comparisons• ...missed opportunities (that is, other important work that doesn’t get done) Creating the RFP............................................................................... 8-9• ...lost stakeholder buy-in and compliance because your process takes too much of their Finalizing the RFP .......................................................................... 10-11 time, uses their time and knowledge inefficiently and imprecisely or seems poorly executed Onboarding suppliers ...................................................................... 12-13 or unscientific Obtaining suppliers’ responses ........................................................... 14-15This eBOOK sets out a framework for understanding and calculating the true total costassociated with manual strategic sourcing processes. Our example is hypothetical, but Compiling suppliers’ responses ........................................................... 16-17we have endeavored to make reasonable cycle-time and manhour assumptions based on Reviewing and scoring suppliers’ responses, part 1 ................................... 18-19a combination of direct experience, interviews, and validation by professionals who have Reviewing and scoring suppliers’ responses, part 2 ................................... 20-21participated in both manual and automated sourcing processes. While not every manual Reviewing and scoring suppliers’ responses, part 3 ................................... 22-23sourcing process will experience the trials seen in this one, it is noteworthy that our model Final negotiations, obtaining consensus, awarding business ........................ 24-25accounts only for potential internal costs associated with sourcing processes. It does notinclude suppliers’ likely costs and it covers only a single sourcing category. We encourage The final tally ..................................................................................... 26you to apply a similar time/activity tracking model to your next manual strategic sourcing Key considerations............................................................................... 27endeavor. Extrapolate the results across an entire set of spend categories to be sourced in a About ZYCUS eSourcing ..................................................................... 28-29given year and across all participating suppliers’ organizations. It is our expectation that you Zycus User Ramp Up Services ................................................................. 30will quickly find an ironclad business case for investing in—and rapidly adopting—easy-to- About Zycus ....................................................................................... 31use, state-of-the-art eSourcing Solutions in your strategic sourcing endeavors.
The Company The Sourcing Project THE CATEGORY: Telecommunications devices, services, management, and support. ANNUAL SPEND: $4.5 million. 5 OBJECTIVE: Reduce total annual spend by 10%. TEAM: CPO (oversight), procurement category manager, plus key stakeholders from IT, sales,A midsize—$450 million/year—high technology company based in logistics, and finance organizations.San Jose, Calif. with 500 employees.
The Sourcing Team The Stakeholders6 7 DAVE CAROL LAURA FRANK BOB MIKE LYNN Chief Procurement Administrative Strategic Sourcing National Sales IT Director Logistics Director Finance Officer Assistant Category Manager Director Director & Admin Degree : MBA Degree : B.Arts Degree : B.Science Degree : B.Comm. Degree: B.Tech. Degree: B.Science Degree : MBA Exp : 18 yrs Exp : 24 yrs Exp : 8 yrs Exp : 12 yrs Exp : 16 yrs Exp : 7 yrs Exp : 21 yrs Salary : $201K Salary : $56K Salary : $89K Base+comm : $135K Salary : $119K Salary : $77.5K Salary : $153K +Benefits : $261K +Benefits : $72.8K +Benefits: $115.7K +Benefits : $175.5K + Benefits: $154.7K + Benefits: $100.8K + Benefits: $198.9K Works : 60 hrs/wk Works: 40 hrs/wk Works: 50 hrs/wk Works : 65 hrs/wk Works : 60 hrs/wk Works : 50 hrs/wk Works: 50 hrs/wk Cost/hr : $90.73 Cost/hr : $37.92 Cost/hr : $46.28 Cost/hr : $56.25 Cost/hr : $52.62 Cost/hr : $40.30 Cost/hr : $82.88 Salaries based on profiles generated at www.payscale.com. Benefits and fringe assumption =+30%.Vacation time included in cost/hr calculation
Before eSourcing After eSourcing Creating the RFP Creating the RFP VS. • Laura looks to see what was done the last time her company sourced • Laura looks to see what was done the last time her company sourced telecommunications equipment and services. Unfortunately, the person who telecommunications equipment and services. preceded her has left the company. After hunting around for a couple of hours, Laura learns that her predecessor’s computer was wiped months ago • Within 15 minutes, she locates the former RFP, reads it through, and takes and there are no hardcopy files to be found. a few notes. She notices that Bob was a stakeholder on the last sourcing team as well; makes a mental note to speak with him about what went well • Laura needs to start from scratch in terms of defining specifications, and what could be improved in the current sourcing round. questions, and requirements for the RFP. Dave advises her to meet seperately8 with each of the designated stakeholders to ensure they all feel comfortable 9 • With a few clicks of her mouse, Laura creates a new sourcing event based expressing their opinions at the outset of the process. on the former event; she e-mails her stakeholders asking them to login, review the specifications, questions, and other requirements and get back to • Three of the stakeholders—Bob, Mike, and Lynn—are available right away, her with suggested edits within three days. but it takes Laura a whole week to track down road warrior Frank. After meeting with each stakeholder, Laura spends four hours collating and typing her notes from the meetings. 8 day(s) CYCLE TIME ‹1 day(s) 14 hour(s) MAN HOURS ‹1 hour(s) $695 ACTIVITY COST $35
Before eSourcing After eSourcing Finalizing the RFP Finalizing the RFP VS. • Laura convenes a meeting of the stakeholders to review collated questions/ • Laura meets with Bob to get his take on the last sourcing round for this specifications for the RFP. Because Frank is on the road again, it takes four category. In the meeting, they log in to eSourcing together to review and days to set up the meeting. incorporate Bob’s changes on the fly, dragging and dropping to add new questions and easily editing existing questions and weights. • The meeting drags on for two hours after which Laura hands her notes to Carol and asks her to generate an RFP, using the company’s standard MS Word • Mike and Lynn log in, review and e-mail their comments to Laura by day template for RFPs. Including some back and forth with questions from Carol three. After another day goes by and Laura still has not heard from Frank, to Laura, the process takes two days and consumes six hours of Carol’s time. she appeals to Dave, who pings Frank and reminds him that he can log in to10 eSourcing from any location with secure Internet service. Frank complies. 11 • Laura e-mails the RFP draft out to each stakeholder. Each reviews it and sends corrections back. Lynn and Bob make edits to the MS Word doc (with • Laura edits the event in eSourcing, e-mails her stakeholders. Each changes tracked), while Mike puts his comments into an e-mail. Frank calls stakeholder logs in, reviews the RFP, and signs off. Laura pings Dave to let his edits in from the road. Laura collates edits and sends them to Carol who him know she is ready to go. Dave logs in, reviews the RFP, makes a couple of updates the RFP. Laura e-mails it to all the stakeholders who review the suggestions, which Laura incorporates. document and sign off. 11 day(s) CYCLE TIME 7 day(s) 25 hour(s) MAN HOURS 13 hour(s) $1,228 ACTIVITY COST $565
Before eSourcing After eSourcing Onboarding suppliers Onboarding suppliers VS. • Laura has compiled a list of 12 potential suppliers for her RFP, including • To invite suppliers to participate in her RFP, Laura selects nine approved the incumbent. With help from Carol, she obtains good contact information suppliers—including the incumbent—from the approved/preferred supplier for nine of them. For the remaining three, the best Carol can do is to find database uploaded previously to her eSourcing tool. “sales@” type e-mail addresses. Laura does not feel confident that her RFP will land in the right hands, so she decides to eliminate those suppliers from • With a single click of her mouse, she releases the RFP with instructions the process. to accept terms and conditions within one day and to respond fully within five days. Of the nine invites, only five accept. Dave wants to see a more • Laura e-mails each of the remaining nine with a copy of the RFP attached. competitive market, so Laura pings the four who have neglected to accept12 She asks them to acknowledge receipt of her e-mail and to let her know and also researches and adds two additional suppliers—on the fly—to her 13 within a day whether or not they intend to participate. Five of the nine—the database. She gives them each a day more to accept, but maintains the incumbent among them—reply with intent to participate. original deadline for completing the RFP. • Because the RFP is long and fairly complex—with some 44 questions and • Laura reports to Dave that eight suppliers have accepted the RFP and she other info requirements—Dave and Laura are concerned about the analysis will have the ability to monitor their response entries in eSourcing to ensure part of the process, so decide not to push for greater participation. they are, in fact, participating. 2 day(s) CYCLE TIME 2 day(s) 4 hour(s) MAN HOURS 4 hour(s) $168 ACTIVITY COST $162
Before eSourcing After eSourcing Obtaining suppliers’ responses Obtaining suppliers’ responses VS. • The team waits the specified five days for suppliers to respond to their RFP. • On day three after sending out her RFP, Laura checks eSourcing to monitor Only three of the five suppliers actually respond by the deadline, so Laura supplier activity. See sees that five of the eight have responses in progress, sends followup e-mails to the other two. One of them responds one day late. while three have not yet begun. She pings those three to remind them of the Laura sends a final e-mail to the fifth, who never ends up responding. deadline and to ask if they require any assistance or clarification. • Of the four responses she has received, Laura notes that two have • In the meantime, Laura checks her event’s eForum. She finds that responded, as directed, by adding their answers to the original MS Word RFP several suppliers have requested clarifications. She responds to most of template. One has sent in a separate, answers-only document in PDF format, these privately, but, in one case, she feels that all will benefit from the14 while the fourth has dispensed with the template altogether, opting instead clarification, so she posts a response publicly. NOTE: In the eForum, suppliers 15 to respond with a branded and highly stylized PowerPoint presentation. see each other by number only, not by name. • Laura pings the PDF sender to resend in MS Word format so the answers • By close of business on day five, all eight suppliers have either responded can be cut and pasted. She’s not sure what to do with the PowerPoint. She directly online or downloaded the RFP to MS Excel, completed the worksheet considers rejecting the supplier from the process, but Dave tells her to send and reuploaded to eSourcing. All required questions are complete and in it along to Carol with the others to maintain competiton. standard format. 8 day(s) CYCLE TIME 5 day(s) 0.5 hour(s) MAN HOURS 2 hour(s) $21 ACTIVITY COST $93
Before eSourcing After eSourcing Compiling suppliers’ responses Compiling suppliers’ responses VS. • Laura sends the four supplier responses to Carol and asks her to collate • No action needed. While Laura spent a bit more in terms of time and activity them into an MS Excel worksheet for the team. Because there is so much cost in the prior process step, she also gained greater visibility into the information, Carol decides she can’t possibly acccomplish this on a single suppliers’ side of the process. She was able to track and confirm their timely worksheet. She decides to put each question into a separate worksheet and participation in the process and to address their questions and concerns in a to cut and paste in suppliers’ responses so they can be compared. highly efficient and effective way. • For the three suppliers who responded in the order the questions were • The result is that suppliers’ responses to the RFQ are standardized. asked, this process is time consuming but relatively easy to do. Still, as The eSourcing tool has forced them to complete all information and has16 she works, Carol notices some fairly substantial differences in the way the disallowed any changes to formatting or structure (even if they chose to 17 suppliers have interpreted and responded to the questions. For example, they download the RFP and complete it in MS Excel). have disregarded Laura’s instructions and quoted service rates using their own preferred bases and work units. • Suppliers responses to each question are now ready to be viewed side-by- side on single screens and to be scored easily by Laura and her stakeholders. • Where the PPT supplier is concerned, Carol hunts and pecks as best she can, but succeeds in finding only about half of the required information. 1 day(s) CYCLE TIME 0 day(s) 8 hour(s) MAN HOURS 0 hour(s) $303 ACTIVITY COST $0
Before eSourcing After eSourcing Reviewing and scoring suppliers’ responses, part 1 Reviewing and scoring suppliers’ responses, part 1 VS. • After receiving the compiled spreadsheet back from Carol, Laura e-mails • For multiple choice and quantitative questions, Laura has used eSourcing it to her stakeholders, explains how it is structured, and asks them to review to set up automated scoring. For example, because the strategy is to push all in advance of a meeting that will take place in six days’ time (Frank is on the suppliers to 45-day payment terms, she sets the tool automatically to score road again). longer payment terms higher. • Lynn, who only cares about the finance parts—like rates, payment methods • The eSourcing tool also enables Laura to ask her stakeholders to score only and terms—gets frustrated because Carol has only numbered the tabs and questions most relevant to them. So, Lynn scores finance terms. Dave and she can not easily find what she is looking for. Mike spends two hours printing Frank care about things like devices, costs, and service coverage for their18 out each tab (he rarely uses MS Excel, so doesn’t know about the >Print teams in sales and logistics. Bob will pass judgement on suppliers’ support 19 Entire Workbook command and—due to poor formatting by Carol—he also plans and performance management and monitoring capabilities. prints 500 nearly-blank pages in the process). Mike is not happy. • Because the amount of scoring per stakeholder is lower, because they can • Both Laura and Bob review the spreadsheet thoroughly, while Frank—after easily compare suppliers side by side on single screens, and because they can one extremely frustrating attempt to get the file printed in the Business access eSourcing from anywhere, the team accomplishes its scoring task only Center at his hotel—gives up altogether. a day behind schedule (Frank’s fault once again!). 7 day(s) CYCLE TIME 4 day(s) 27 hour(s) MAN HOURS 24 hour(s) $1,347 ACTIVITY COST $1,225
Before eSourcing After eSourcing Reviewing and scoring suppliers’ responses, part 2 Reviewing and scoring suppliers’ responses, part 2 VS. • The team meets to discuss the outcome of their evaluations. The meeting • Neither meeting nor remediation is needed. has been scheduled for two hours, but it drags on for four—and gets rather heated—as the team struggles to sort out inconsistencies, missing data and other problems with the ways in which suppliers have responded. • Laura spends an entire day collating the problems and communicating them back to suppliers for remediation. She gives them three days to update their responses. PowerPoint supplier never responds, effectively dropping out20 of the running. Laura sends corrected RFPs back to Carol who updates and 21 redistributes the master spreadsheet. • Laura, Bob and Lynn review the updated sheet while Frank and Mike—who have become bored with the process—don’t even bother. 12 day(s) CYCLE TIME 0 day(s) 35 hour(s) MAN HOURS 0 hour(s) $1,840 ACTIVITY COST $0
Before eSourcing After eSourcing Reviewing and scoring suppliers’ responses, part 3 Reviewing and scoring suppliers’ responses, part 3 VS. • The team meets to make a sourcing decision. After two hours, though, the • The team meets to to review their RFQ scoring results. Four suppliers, meeting ends in stalemate as Bob and Frank want to stay with the incumbent including the incumbent, have exceeded the minimum benchmark score. supplier while Laura, Lynn, and Mike want to go with a lower-cost supplier. The deltas among the four suppliers’ scores are actually quite small. On that Laura meets with Dave to appeal for assistance. basis, the team is inclined to award the contract to the incumbent. • Laura and Dave determine that, so far, the process has yielded only a 2% • Dave and Laura, however, are not satisfied with the result. The RFQ has total identified cost reduction; they want to push for more, so decide to bring yielded an identified total contract cost reduction of just 4%-8% (depending in both leading suppliers to present to—and to negotiate with—the team. on supplier), compared to their benchmark objective of 10% savings.22 They recommend to the team that the leading four suppliers be invited to 23 • Carol schedules the meetings. The meeting with Supplier 1 (the incumbent) participate in a price-only eAuction round to take place in two days time. is set to take place almost immediately. Meeting with Supplier 2, though, won’t happen for another 10 days. They need at least four days to prepare • The team agrees. Laura uses eSourcing to invite and confirm participation and to travel; by then, Frank will be on the road again. He is not particularly from the four leaders, to inform disqualified suppliers that they have been interested in making the second meeting happen, so refuses to rearrange his eliminated from the process, and to build the eAuction event, locking down schedule. all items and contract terms, excluding rates. 3 day(s) CYCLE TIME 3 day(s) 13 hour(s) MAN HOURS 12 hour(s) $732 ACTIVITY COST $647
Before eSourcing After eSourcing Final negotiations, obtaining consensus, awarding business Final negotiations, obtaining consensus, awarding business VS. • The team spends three hours each meeting and negotiating various rates, • With Dave and her stakeholders in attendance, Laura conducts the eAuction terms and conditions with the two suppliers. Supplier 1, the incumbent, holds with a two-hour time limit. Supplier 3—having cut rates an additional 7% on its rates but—having greater insight into the account—offers up several for a total 15% cost reduction—emerges as the clear winner. Bob and Frank, nonprice concessions, including device and service-level upgrades, volume though, remain unconvinced. Bob, in particular, is worried about the cost and early payment discounts. Supplier 2, by contrast, offers slightly lower impact on his organization of switching to a new service provider. rates (amounting to a 2.5% total cost reduction), but does not improve its offer in any other ways. • Laura, who has her laptop wired to an overhead projector, takes the team through a series of “What If?” award scenarios where they alter various24 • Three days later, the team reconvenes to make its final sourcing decision. weighting criteria, including switching costs. They are able to view the 25 Instead of making the decision easier, though, the face-to-face negotiation impacts, on the fly, in an intuitive graphical way. No matter what objections round has actually made the decision more difficult by allowing the suppliers Bob and Frank raise, Laura can demonstrate with real data (and zero to differentiate their offerings. After an impassioned speech from Bob about emotion) why Supplier 3 is the best choice. Bob and Frank eventually agree. switching costs, the team is persuaded to stay with the incumbent. Laura Because the event was more competitive and because they stayed in control and Dave—worried about user adoption and compliance without stakeholder of specifications and terms, Laura and Dave walk away with stakeholder buy- support—take their 2% cost reduction and walk away (frustrated). in and a net 15% total cost reduction, beating their original objective. 13 day(s) CYCLE TIME 1 day(s) 48 hour(s) MAN HOURS 4 hour(s) $2,952 ACTIVITY COST $1,476
The FINAL tally KEY considerations MANUAL eSOURCING In addition to consuming more time and resources, the MANUAL sourcing process forces procurement to: • Opt for less supplier competition due to resource and time constraints • Watch helplessly as their sourcing event becomes less competitive due to CYCLETIME 65 days 23 days poor supplier participation • Allow suppliers to disrupt the sourcing process by deviating from the RFP format • Obtain a sourcing decision based more on gut feel than on scientific examination of facts • Expend procurement resources on administrative tasks and meetings • Sacrifice savings by being unable to make a strong case for the less costly option26 MANHOURS 174 59 • Give key stakeholders a bad experience and lose their interest—possibly jeopardizing their buy-in, support for compliance efforts, and future willingness to participate in 27 sourcing team activities • Increase suppliers’ costs (not calculated here) with remediation, meetings, and travel • Source only a single category in the time they could have sourced 2-3 more categories ACTIVITY $9,286 $4,203 Meanwhile, with eSourcing, procurement has been able to: COST • Make a more competitive market • Control suppliers’ inputs • Consume a minimum of stakeholders’ time (meaning they can spend it doing what they are paid to do well) IDENTIFIED 2% 15% • Drive the sourcing team to consensus more easily and with less cost to suppliers • Achieve greater savings and set the table for higher compliance and ongoing support from SAVINGS stakeholders
About Zycus eSOURCING Zycus eSourcing combines state-of-the-art sourcing technology with a easy-to-use interface Zycus provides a full-featured—easy to use—eSourcing to fully automate, optimize, and control your sourcing process. Solution that will help you, · Achieve rapid and mass user adoption With ZYCUS eSourcing, you get: · Increase your savings rates · Shrink sourcing cycle times A fast start. The solution’s robust set of drag-and-drop presets empowers sourcing beginners to start collaborating, sourcing, analyzing, and awarding business in just one day Zycus eSourcing streamlines all steps in the strategic sourcing process—from auction/RFx with virtually zero training. modeling through event execution, collaborative analysis, and award of business. And, while other sourcing applications sacrifice usability in favor of complex technology, Global 1,00028 organizations prefer Zycus eSourcing because it offers, A rapid ramp up. Because eSourcing is so easy to use, sourcing personnel, stakeholders, 29 and suppliers adopt rapidly and participate more consistently, leading to better event results Easy event creation and compliance. • Drag and drop auction and RFx modeling for simple and complex events • Ability to model complex cost breakdowns • Exhaustive event analysis A sourcing organization with potential to address 100% of spend. Engineered to mature with your strategic sourcing organization, Zycus eSourcing gives people the power Interactive graphical analysis to accelerate sourcing timelines and to make more competitive markets in more categories. • One-click scenario creation They have all the power they need to develop innovative, customized, and complex • Powerful event collaboration sourcing events, analyses, and business-award scenarios on the fly with no ongoing training • What-if analysis scenarios requirements. Unique forum functionality for real-time communication • Single platform for all stakeholders • Collaborative scoring capabilities
Zycus User Ramp Up Services About Zycus Zycus is the world’s leading provider of Spend Management Solutions to Global 1000 companies. The Zycus solu- The Zycus eSourcing Event Management Service— tions suite— comprising Actionable Spend Analysis, eSourcing, Contract Management, and Supplier Performance • Gets you started with eSourcing on Day 1 Management—combine cutting-edge technology and domain expertise to enable greater user adoption and • Completes your first event in the shortest possible cycle time—possibly returning your full invest- sustainable savings. ment plus additional savings Innovation and ease of use are at the core of every Zycus offering. Zycus solutions facilitate greater process planning, control, and increased corporate alignment of spend management initiatives. Zycus Spend Manage- When your sourcing team sees the solution generating hard dollar savings with minimal effort, they ment solutions help procurement departments of Global 1000 companies analyze, plan, and source through an adopt more rapidly and progress more quickly to a point where no category seems off limits for intuitive and objective-driven process. eSourcing. With proven spend management deployments across the globe and with over 100 implementations, Zycus solu- tions have emerged as global favorites. Zycus has over 250 employees across North America, Europe, and Asia You provide— Pacific.30 Event questions, scoring parameters, and supplier selection criteria 31 Your Zycus eSourcing team does the rest— • Creates event RFx or auction template • Models scoring parameters • Conducts event • Scores event responses • Analyzes results • Creates what-if scenarios • Builds award scenarios NORTH AMERICA • 103 Carnegie Center • Suite 117 • Princeton NJ USA • 08540 • +1 609 799 5664 EUROPE • EPJ Business Center • Suite 418 • Mainzer Landstrasse, 27-31 • 60329 Frankfurt am Main Germany • +49 (0) 69 27 4015 251 ASIA PACIFIC • Building No 75, Nirlon Complex • Goregaon (East) • Mumbai India 400 063 +91 22 66407676 www.zycus.com