No conversation about the move to e-procurement or e-sourcing is complete without including the term risk. There are risks—both perceived and real—in moving purchasing operations online, but there are also existing risks in the sourcing and procurement processes that are mitigated—intentionally or otherwise—by moving to an online procurement environment.

But the risk implications in e-procurement are often overlooked. A recent PURCHASING Magazine survey finds only 11% of respondents practicing some type of online risk management in their procurement. Users of these new systems need to consider the two sides of this risky equation to maximize the benefits of the new tools in play...

Risk assessment is an important part of any software implementation and e-procurement and e-sourcing implementations are certainly no exception. The risks in moving to e-sourcing and e-procurement vary from user to user, some very real and some more rumor than fact, depending on the individual implementation. Below are some of the risks identified by several industry experts as most pressing.

Risk #1:

Critical mass

Perhaps the most often-cited risk in moving to an e-procurement tool is that an adopting company will make a substantial investment in the software, but for any number of reasons the implementation never takes flight. Users may not adapt to it well. Suppliers may reject the technology or new process. Technical issues may stall the implementation. These risks can be both real and perceived, according to some experts. The negative outcomes can certainly materialize, but are not a certainty.

"Moving to e-procurement is like any other software implementation in that it can be expensive and it may not go very smoothly," says Brooke Faust, an analyst with Chicago-based technology consulting firm Doculabs. "So just getting the supplier traction or the critical mass to justify the move is a valid risk that a buying organization needs to consider before pulling the switch."

As more implementations come online, there are more success stories touting the benefits of e-procurement and e-sourcing tools. But there are enough horror stories circulating on e-mail lists, at benchmarking meetings and on conference show floors, to make potential adopters aware of the potential pitfalls.

Mike Mendoza, global e-procurement leader at building materials firm Owens Corning says change management was the biggest risk the Toledo, Ohio-based company saw in moving to a reverse auction tool. His company was afraid that after all the work of deploying this tool, target users and suppliers would reject it and the whole process would veer off-track or bomb altogether.

"We are an old manufacturing company that has done procurement the same way for a long time," Mendoza says. "This was very different than what we were used to, so managing the internal processes around the switch has been increasingly challenging." But Mendoza says the supplier base is getting more familiar with e-sourcing thanks to the number of implementations happening, so familiarizing suppliers with the new process is getting much easier than when Owens Corning first started using Pittsburgh-based e-sourcing services provider FreeMarkets back in 1999.

"Companies that approach e-sourcing as a sideline initiative just to see how it works and use it a couple times a month will have difficulty in being successful with their implementations," says Kent Parker, vice president and general manager of global sourcing services at FreeMarkets.

Risk #2:

Data security

Putting a company's spend online means dealing with the security issues that come with any Internet-related deployment. This brings up questions like: Who has access to our data? Where is it stored? How is it protected? What happens if we change providers? Do we get our data back? Do they sell spend data to our competitors?

The concerns are real and these questions are still being answered in nearly every e-sourcing or e-procurement implementation today. But software and service providers report that users are gaining more and more confidence in the new technologies.

"I think it is absolutely still a concern with our customers," says Ian Sullivan, vice president of the solutions delivery group at e-sourcing provider Perfect Commerce of Palo Alto, Calif. "We see it from buyers who want a completely closed system to guard their data. They want to understand where the data is and don't want to share it with suppliers. And suppliers are still nervous about information they are putting into the system and where it is housed."

A recent PURCHASING survey finds 54% of responding buyers using supplier catalogs inside their firewalls while 36% of respondents are using catalogs that reside in Net marketplaces. Sullivan says e-procurement service providers are doing their best to explain where data is stored and to provide customers with the most accurate information possible. In some cases the real challenge is getting customers to relay their concerns about data integrity up front. While data security is a concern with many users, it is one they often don't address with providers, because they assume the answer will be more marketing than security.

Risk #3:

Management loses spending control

Another perceived risk heard from novice online buyers is that moving to e-procurement will put spending decisions in the wrong hands internally and management will lose decision-making control over who spends how much on what. The fear is that giving employees the authority to buy their own office supplies from online catalogs or on a network will create dramatic increases in spending levels in those areas. It's the "if you offer it, they will buy it" risk.

Sullivan says nothing could be further from the truth. Moving a spend online provides more control at all levels of an organization and the spend management tools available today are a giant leap forward from what was available a few short years ago. In short, using e-procurement provides more control over spending levels than paper-based transactions.

"It takes some time to bring people to the idea that the e-procurement system is a decision support system and is meant to augment the existing process. E-procurement is not a decision-making tool," Sullivan explains.

One risk that is a serious concern in terms of control is the amount of involvement an IT department has in selection and implementation of an e-procurement or e-sourcing application (or any software for that matter). IT should certainly be involved in any implementation, but many current adopters suggest keeping IT at arm's length and avoiding analysis of technical requirements until the purchasing organization is sure the tool is something it can use.

Risk #4:

Accelerated cycle times expose sourcing flaws

Moving to e-sourcing speeds up the sourcing process dramatically. That is clearly one of its highly touted benefits documented by early adopters. But Parker says that increased efficiency and speed can also put the rest of a supply chain in chaos if it is not prepared to step up its performance to meet the increased speed in the purchasing link of the chain.

"Things start to move faster and expose weaknesses in your sourcing—whether it be in defining your requirements before you start sourcing or representing marketplace opportunity that you can act upon when negotiations are over. The risks increase because the sourcing process moves faster and suppliers participating in the process are putting a lot of effort into being part of the new process."

Risk #5:

Suppliers may bid on contracts they cannot complete

You've heard the story. Supplier B outbids supplier A in a reverse auction. Buyer goes with supplier B, but cannot get an actual product delivered. Eventually the contract is cancelled and the buyer goes back to supplier A for the part at a cost higher than the original quote.

During reverse auctions, there is a real and documented risk that some suppliers will participate in the auction with no real intention of making good on a contract if they win it. They are simply trying to win the contract first to get the business from a major OEM and worry about if they can complete the work later, only to realize they cannot complete the contract. This risk is another argument for the improved supplier evaluation that needs to come with e-sourcing (see #2 below).

But e-sourcing technology providers are getting the hint and users are taking notice. Newly improved e-sourcing tools include quality concerns in the bidding process and make it more difficult for suppliers to low-ball bids online after all quality concerns are factored in.

On the marketplace front, use of private marketplaces focusing on well-known suppliers minimizes risks in this area and helps maintain long-standing supplier relationships by providing invitations to an exclusive party.

E-buying and sourcing brings more than just new risks. In fact, many users are finding that online sourcing and buying can mitigate some risks that have been present in the procurement process for years and that moving a spend online forces them to get their procurement houses in order.

"This hits on the question of 'What is the technology for?'" says Mary Rhodes, leader of supply management solutions business unit at Dun & Bradstreet (Murray Hill, N.J.). "Technology is there to enable a process that has already been predetermined. I think the reason e-sourcing hasn't taken off the way it should is because people have tried to put it into place without realizing there are precursors to an e-procurement process. Understanding who a trading partner is and deciding whether or not you want to do business with that partner."

Mitigated risk #1:

Evaluating your spend the right way

The risk of failure in an e-procurement/e-sourcing implementation is often determined by an organization's familiarity with strategic sourcing in general. Sullivan feels the sourcing organizations that have worked with consultants and understand the value of managing a strategic sourcing process are just looking to enable their process with the right technology. But if the company has no one who understands strategic sourcing to begin with and simply moves to e-sourcing because it is considered the next killer app, then it will not make the most of the technology designed to promote established strategic sourcing processes.

Moving a company's spend online is not a good idea until clear strategic sourcing goals have been established so technology can be applied to those goals. That may include bringing in a consulting firm to review procurement strategy and to get a handle on what is being spent and where before deciding what technology to implement. Many companies are using the move to e-sourcing as a good chance to get this long-awaited evaluation done. Some find subtle improvements can be made and some find surprises that result in big savings even before moving the sourcing process online.

Mitigated risk #2:

Evaluating suppliers the right way

Most new e-procurement and e-sourcing users find themselves evaluating suppliers more carefully than they did in a paper-based environment thanks to new online tools and technologies that streamline the evaluation process.

"In the process that happens before e-sourcing, you need to evaluate who your potential trading partners are and determine if they meet your qualifications around risk," explains Dun & Bradstreet's Rhodes. "But simply making an evaluation of a supplier's business status at the point of sourcing is not enough anymore. Things change quickly now. The supplier that is a high-flier today could be a dog tomorrow."

E-sourcing brings in new suppliers, which means more evaluation of new suppliers, but keeping an eye on existing suppliers is also important. If a supplier is given a contract for the lifecycle of a product, that supplier's risk factor may change dramatically in the contracted period. "Risk management isn't a one-time shot," Rhodes says. "It's about ongoing risk and evaluation of risk in your supply base." Rhodes says that, historically, risk management has been a much higher priority on the direct materials side, but is moving slowly into the services and MRO side as well.

There is danger in loving a supplier to death by awarding it increased amounts of business until it can no longer handle the workload and quality issues come into play. Parker says companies using e-sourcing tend to avoid that by spending more time up front defining expectations and requirements prior to negotiating and awarding business to the supply base. "I think the quality of the definition of what is expected of a supplier has gone up with e-sourcing. It has expanded the ability to evaluate suppliers, but I am not sure if users have taken advantage of this."

New tools available online are providing supplier information in quick and easy-to-use formats. Tools from firms like Dun & Bradstreet, Open Ratings and financial statements on the SEC Web site are helping buyers see major supplier issues much earlier than ever before.

Mitigated risk #3:

Automated controls reduce renegade spending

One of the most often cited improvements in moving to an e-procurement system is the reduction in renegade spending brought about through automated controls and electronic approval routing. While this should not be the goal of an implementation, it is a quick-hit improvement that can help get some return on investment (ROI) and keep senior executives at bay. And the oft-cited risk of giving more users spending capabilities via online catalogs (see Risk #3 above) is mitigated with these online controls.

"I think one of the most basic things e-procurement does now and will continue to do better is the security of approval processes," says Keith Houseman, vice president of sourcing operations and implementation at ICG Commerce. "Proper authority and nonapproved purchases are pretty well addressed in most e-procurement systems today. A user is really only allowed to do what [purchasing] wants him or her to do."

Automated purchase order acknowledgement eliminates the guesswork buyers have been doing for eons. Lot traceability provided in online buying provides some added insurance in the supply chain. Automated buying also improves contract adherence and minimizes mistakes in orders.

Mitigated risk #4:

Increased visibility improves forecasting

Memories of supply problems in 2000 are still fresh in many buyers' minds. Frantically calling around and surfing the Internet for 10-cent parts to keep production lines moving is not something many buyers want to relive. Many new e-sourcing and e-procurement adopters report that increased visibility gained from moving a supply chain online and sharing information with suppliers more closely helps avoid supply snags and shortages. Getting instant notification that a supplier is having issues with a certain part and being able to contact a second supplier quickly can mitigate the risks of parts shortages. And communicating more closely internationally can help buyers get suppliers' parts into the country more quickly to minimize delays.