A tale of 2 companies
How UTC automated its general procurement tasks by outsourcing to IBM
By -- Purchasing, 6/15/2000 6:00:00 AM
Kent Brittan is a finance person by profession. He's also the vice president of supply management for Hartford, Conn.-based United Technologies Corp. (UTC), the multinational manufacturing company comprising Carrier, Otis, Sikorsky, Hamilton Sundstrand, Pratt & Whitney and International Fuel Cells, which spends in the vicinity of $14.5 billion on products and services each year.
When Brittan took control of UTC's corporate sourcing organization in 1997, general procurement for the various major business units was very decentralized. For its biggest non-production spending categories-for example, travel, energy, capital equipment, office supplies, MRO, information technology-the UTC corporate group had deployed sourcing councils to develop buying leverage across the various divisions. But corporate sourcing had no real means for enforcing the strategic supply agreements created by its councils. In some cases, this meant the group had trouble delivering promised volumes to corporate contracts. Says Brittan: "You can do all the corporate deals in the world. Without compliance, you can't make any progress."
At root of UTC's compliance problem, Brittan says, was the lack of an information system that would monitor and control the company's indirect-or general procurement-spending. "For general procurement," he says, "we needed a system for two reasons. We needed data to make corporate deals with strategic suppliers and we needed a system to drive compliance with corporate contracts."
So Brittan embarked on a process-benchmarking mission. Along the road, he met up with Gene Richter, chief procurement officer for IBM. In his six years at the helm of sourcing for IBM, Richter had undertaken, in essence, the same process reengineering and centralization process that Brittan was pursuing at UTC. Recognizing the similarities-and hoping to avoid reinventing the wheel-Brittan asked Richter if he might buy IBM's successful procurement information system. A surprised Richter said it wasn't for sale. So Brittan returned from his mission having seen what he wished to accomplish but still carrying the heavy burden of deploying, from scratch, a multi-company information system that would centralize general procurement for UTC.
Back at IBM, however, Brittan's offer to buy the information system had set some wheels into motion, according to Gary Saunders, IBM project executive. "Kent Brittan was excited about the way IBM had reengineered its entire procurement process-both direct and indirect spends," Saunders recalls. "At the time, we hadn't considered procurement to be a core service 'for sale'-so we balked at the idea." Still, he notes, "We'd invested significant sums in restructuring our operations, building capabilities and creating systems. When we began to think about how large the market for these capabilities might be, the idea of creating a service offering began to take shape."
A short two months after his visit, Brittan received a phone call from IBM's Global Services organization. If he was still interested, they wanted a meeting-and fast. At the meeting, Brittan says, IBM offered not only its information system, but also its services in general procurement (GP) sourcing. In essence, IBM offered to become UTC's outsourcing partner for general procurement. "We were the inspiration for them to create this business," Brittan says. "Once they had committed to the idea, they moved it from procurement into their Global Services organization."
The agreement that emerged between the two companies has three pieces-
-
Strategic sourcing,
-
Purchasing operations, and
-
System management and support.
The strategic piece, Brittan says, works like a standard strategic sourcing consulting engagement. Dedicated IBM personnel assist UTC sourcing teams with the one-time resource-intensive tasks associated with gathering and scrubbing historical GP spend data, identifying potential sources of buying leverage, analyzing supply markets, qualifying suppliers, developing strategic supply relationships and contracts, and establishing mechanisms for driving continuous process and productivity improvements. "We have an eight-step process for strategic sourcing," Brittan says. "IBM people have helped our teams to implement this process for major GP commodities." Once a contract is established for a particular commodity group, IBM teams move on to other commodities. UTC experts manage the new contracts going forward. "UTC has sourcing experts covering a huge gamut of commodities," Saunders observes. "Early on," he says, "IBM was tightly engaged on the strategic sourcing side. At present, the IBM-UTC teams have completed most of the high-level cross-divisional contracts for the largest pieces of its general procurement spend."
The purchasing operations and system management pieces of the relationship reflect UTC's objective of rendering "buyerless" the lion's share of its GP transactions, according to Brittan. "We will always have some things that require full buyer participation," he notes, citing capital equipment and facilities-related buys as major examples. But the goal-now in sight-for most general procurement at UTC is to completely automate the purchase process from requisition to payment (as Brittan says, "req-to-check").
Even the slickest automated systems require some type of ongoing support from people, however. For UTC, the two companies agreed that IBM personnel, located principally in Endicott, N.Y., would-
-
Process requisitions, quotes, orders and invoices,
-
Perform system maintenance and upgrades,
-
Field day-to-day questions from requisitioners,
-
Set up and train new users,
-
Field day-to-day questions from requisitioners and suppliers, and
-
Continually search for opportunities to standardize and leverage buying volumes.
To kick off its general procurement outsourcing to IBM, UTC selected one business division-Carrier, a maker of air conditioning, heating and refrigeration equipment headquartered in Farmington, Conn. "We selected Carrier for two reasons," Brittan says. "First, we wanted the program to have strong support, a champion so to speak, and management at Carrier really endorsed the whole concept." The second factor, he notes, is that Carrier is a decentralized company with a strong presence in the U.S. "We knew we would be dealing with a multi-factory, multi-branch environment," Brittan says. "We thought this would allow us to grasp the issues associated with implementing the system on a larger scale among several very different companies."
The req-to-check system
The IBM Web-based information system for managing general procurement involves an extraordinary amount of integration. End users order items from their desktops, relevant data is routed for approval (if necessary), the IBM system processes the requisitions, and POs are transmitted directly to suppliers. Suppliers generate electronic invoices when they ship products, invoices are matched with orders, payments are made, and UTC's ledgers are updated, all automatically with little or no human intervention. "Suppliers," Saunders says, "may receive orders within minutes of the requisition submission. A person might order something at 10 a.m. By 10:30, it's being put on a truck."
To implement such a highly integrated system, IBM has had to involve virtually every corporate function at UTC. For example, they've involved human resources (HR) to establish personnel reporting structures and corporate finance to establish authorization levels and spending approvals. They've also involved accounting personnel to understand how ledgers, budget control and cost centers are set up at UTC. "This is more than just a front-end requisitioning system," Saunders says. "It's a seamless, automated process-but it takes time and hard work to create."
For this reason, Saunders notes that efforts to implement the IBM-run system have been "very much a joint effort" between the two companies. "I sit right next to Kevin Smith, UTC's director of general procurement. We have equal ownership of this project."
What's more, he says, the UTC divisional teams typically have representation from all their major business functions. "Together we work through the idiosyncrasies of division operations and modify business processes to merge toward a common business process for UTC."
Saunders notes that the teams implementing the system have needed to establish a common nomenclature for UTC. "When you have five largely autonomous business divisions, you may have five corporate languages referring to the same things," he observes. "We needed to assure we would have common data, that everybody would label commodities the same way, and that everybody would refer to suppliers the same way."
While the front end of the system-the desktop interface with people placing requisitions-is newer and has required implementation legwork and customization for UTC, Saunders notes that the back end-the electronic integration with suppliers-was already well established. "IBM has been doing EDI for many years," Saunders remarks. "We're now moving to Web-based transactions. We have thousands of suppliers enabled for electronic transactions. Our back-end connections are well established and very efficient."
Because it had designed and implemented the front end of the system internally, Saunders says IBM did a reasonably good job of estimating how long it would take to put the system into play at UTC. However, given differences in corporate culture, he estimates that initial conversions to the req-to-check system are maybe 20%-25% more difficult than IBM had anticipated. "We knew this would be a complex thing to roll out."
UTC's Carrier division went live in July of 1999. By now, IBM has done well over 20 system installations (at UTC, IBM and other client companies). Its team is well seasoned and they work to a very structured project plan. By leveraging the team's acquired knowledge, Saunders says IBM now has the total systems and business process conversion time for new divisions down to less than six months.
Education and training is another big piece of the implementation process. Over 2,000 users, people who need to place or approve requisitions, have been trained at UTC. IBM supports them by maintaining an 800 number where they can reach someone who will walk them through the process, answer questions, or resolve issues. Saunders says IBM also identifies what it calls "super users" at each location. "These are typically users that generate the highest volumes of transactions. An example is executive secretaries that have the task of ordering many different types of items. We pay special attention to these people and they become advocates, helping people among their local workplace communities."
Going forward at UTC
By all accounts, the Carrier implementation has been very successful, although it has required repeated proving. "We've had to prove the process at Carrier," Saunders says, "not just to the management team, but more importantly to the stakeholders and requisitioners. For example, there are field personnel who are accustomed to locally self-procuring the goods and supplies they need. These people have needed time to develop confidence that many supplies could be available when needed via the IBM process. Fortunately, the Carrier results have met expectations. Cost-savings targets have been surpassed and customer satisfaction levels have been high."
Adds Kevin Smith, UTC's director of general procurement: "By proving the concept at Carrier first, corporate sourcing has been able to develop buy in from the other UTC divisions. We've done this by routinely attending and presenting updates and results at numerous cross-divisional meetings taking place at UTC." For example, Smith says, "there are financial councils. We attend their meetings, report on what we're doing, and ask for their support. There are also monthly meetings among the procurement managers for each division. We give them specific updates and request their input. We make decisions by consensus at UTC. This is a real team environment."
Having transferred all of Carrier to the new system, UTC has now begun to bring its other divisions on line. Otis Elevator and the Hamilton half of Hamilton Sundstrand were due to go live in April 2000. The Pratt & Whitney division was due to go on line in May. The remaining U.S.-based divisions are scheduled for ramp up beginning in August after which IBM will turn its attention to UTC's European operations, Smith says.
The beauty of it all
For a financial professional like Kent Brittan, there are many beauties to be found in a strong corporate strategic sourcing process that is overlaid by an automated req-to-check system for general procurement.
"You won't hear it said very often but, from a financial perspective, companies want the opposite of what individuals want. People want to surf on the Internet, shopping for items. The company wants them to get in and out of transactions as quickly as possible. The company wants to give individuals the smallest reasonable number of choices. Instead of 1,200 types of pens, the company wants to offer maybe five standard choices."
Under the new system, Brittan says, "It is now very difficult for maverick buying to occur because all orders and payments flow through a very controlled process." This control gives UTC full compliance with corporate strategic supply contracts, allowing it to pursue more highly leveraged volume deals with suppliers.
Volume deals aside, however, Brittan remarks that, "The biggest savings inherent in this system are the things that never get bought." Because the system tracks every transaction, it can generate monthly spend reports by person and cost center, he says, "It forces people to consider and justify their expenditures much more closely."
Another, more subtle, source of cost savings, Brittan says, is the reduction of "inventory that is generally written off because it's not worth tracking." The inventory exists, he says, because people want things to be available when needed. "Now we can track delivery delays and correct problems. As people develop confidence that the system will deliver, we're finding that the inventory begins to go away."
Beyond its ability to control spending behaviors, Brittan says the IBM system also ensures that accounting procedures are followed consistently and correctly. "We make sure the right cost centers are charged, that reconciliation is done automatically, and that approval levels are appropriate and enforced. As a government contractor, we have very specific accounting rules we need to follow. The system ensures this is done correctly."
In describing the benefits of IBM's system, Saunders echoes Brittan's words. "The savings come in many forms. You get price reductions on the goods and services themselves. You have a substantial number of buys that are no longer made. Inventory levels are reduced." What's more, he says, "You begin to do away with the 'use-it-or-lose-it' budget mentality. Now that the company knows where money is being spent, they can target wasteful spending more easily. For example, instead of implementing 10% across-the-board cuts, unfairly penalizing the leaner parts of an organization, the system allows management to understand which parts of the business are running crisply and which are not-at least from an indirect-spend perspective."
Another side benefit is the treatment that comes from becoming a favored customer with suppliers. "Suppliers very much appreciate the IBM process and system," Saunders says. "While the system ensures compliance to contracts, it also includes rigid controls for following contract terms and conditions. It ensures that payments are made on time to meet terms. This allows suppliers to rely on cash flow, so they no longer need to incorporate the risk of late payments into their pricing."
Going forward at IBM
While UTC was the first, it is certainly not the only client for IBM's sourcing and procurement service offerings. The service offerings reside with IBM's Global Services organization under aegis of Bill Schaefer, vice president of sourcing and procurement, and are kept quite separate from the company's internal procurement organization (formerly led by Gene Richter, now headed by John Paterson). Still, Saunders suggests that by being a large multinational OEM itself, IBM may have certain advantages over other providers of third-party strategic sourcing and procurement services.
"When it comes to supplier relations and negotiations, there's no escaping the fact that IBM has strong relationships with many large multinational corporations. In terms of purchasing power, IBM is as big a consumer as any, among the top five," Saunders says. (According to Purchasing Magazine's Top 250 spender's list, IBM ranked third among U.S.-owned publicly held companies in 1999.) "Our supply relationships are very valuable to us and we don't co-mingle our legal contracts or volumes with those of our services clients. Still, there's no getting around the fact that we know the top executives of most major suppliers and have often earned most-favored-customer status with them."
As UTC's Smith sees it, "We have people from an enormous global company working side by side with our teams. These are people with vast practical experience, not people coming out of MBA programs to show you a process."
Smith describes the strategic piece of UTC's relationship with IBM as a type of "ongoing process benchmarking." For example, he says when UTC wanted to consolidate its management of real-estate holdings, the IBM Global Services organization gave it access to high-level people who had done the same-to great effect-for IBM. "It was very important for us to hear about their experiences. They had managed to save quite a bit of money. We've taken the best of what they did that also fits our corporate environment. While we haven't followed their model exactly, we've been able to obtain some very good ideas and insights. They told us what worked and what didn't."
While IBM has decided not to commingle its own buying with that of clients, it has not failed to note the potential for developing purchasing leverage among groups of companies, especially in the current environment where electronic trading exchanges are rapidly proliferating. "Very quickly," Saunders says, "IBM and UTC have developed a network of customers and suppliers that, when combined, can generate purchasing leverage to rival that of the top five or 10. We have a system and business process that will allow us to leverage spending across multiple companies. The next logical step is to look at how this might be turned into a formalized trading network approach."
Now Playing:
