Saturday, October 25, 2008

e-RFx: It's Not Just About the TCO

The most generally accepted value proposition for e-RFx solutions (whether reverse auction, optimization, or online RFP) is their ability to rapidly and effectively drive lowest total cost sourcing decisions through whizz-bangs such as “competition-inducing online bidding environments”, “optimization tools facilitating real-time multi-attribute evaluation”, or one of my personal favorites “a geography-negating virtual collaboration medium where buyers and suppliers can participatively create value-maximizing supply solutions”. Phew, I’d buy it.

The above is all true of course; e-RFx solutions really do help procurement organizations identify and implement lower TCO sourcing strategies than they could before and in less time. One of the oft-overlooked additional advantages of e-RFx technology however is that it also supports the implementation and consistent use of a single, consistent, best practice strategic sourcing process. As an example I have been working recently with a company that decided to transform its procurement department from a tactically focused buying function to a best-in-class strategic sourcing organization. One of the problems that this customer faced was that the quality of the contracts developed by its procurement department varied tremendously depending upon who was doing the contracting. This was because each buyer followed a different sourcing process. One buyer would gather detailed usage and requirements information, develop a structured RFP document, and then follow a formal process to issue the RFP, evaluate responses and make the contract award. Another buyer, for the same or a similar commodity, would follow a far more informal process involving only very rudimentary requirements gathering, issuance of a short bid document to suppliers via email, and a rapid award of business to the successful vendor. The point is not that either sourcing approach is necessarily wrong but that there had been no attempt at this company to define and implement a single process that was agreed to be the best practice sourcing method for that commodity.

The beauty of today’s leading e-RFx tools is that they provide functionality that effectively guides (one could even whisper softly “force”) the buyer through each step of a sourcing process that has been pre-defined as being “best practice” for that commodity. So for a price focused commodity like office supplies a leading e-RFx tool will “guide” the buyer through a sequence of steps including completion of a requirements template that provides suppliers with key data such as projected usage and delivery locations, execution of a reverse auction to set core list prices and off-core discounts, collection of key supplier information, and post-auction evaluation of price and non-price factors. For a more complex commodity such as print, the set of steps could include optimizing the award of business by print sub-category to take into account the fact that one printer can be more cost effective in certain types of print processes than another. For an organization that currently has fragmented and inconsistent approaches to sourcing, e-RFx tools provide an excellent way to define and formalize standard processes for these and other types of commodities.

Of course, e-RFx technology alone will not drive the creation of best-in-class contract and supplier relationships. In many cases there will also need to be a step change increase in buyer skills sets to enable effective management of the underlying sourcing process. That being said, I would recommend that any organization currently seeking to implement strategic sourcing best practices consider the role that today’s e-RFX tools (and also e-RFx’s “sister” e-tools of spend analysis, e-procurement and contract management) can play in helping to support the roll-out and consistent use of a standardized, high quality procurement process. Don’t get me wrong, TCO is clearly king when it comes to the business case for these tools. But the comfort of knowing that everyone in the company responsible for making major supply decisions is using the same high quality process is surely a BIG bonus. dear ole Ted Turner would say, or sort of....."Early to bed, early to rise, work like hell and standardize!"