In the early days of e-sourcing technology, many CFOs, CIOs and executive committees were unsure of the financial benefits an as-yet unproven technology would bring. There were concerns about supplier rejection, internal user pushback and a serious fear of spiraling software costs after many companies went crazy buying software. So, they tracked and monitored the return on any software investment, including e-sourcing.

"Today, the ROI on e-sourcing should be a no-brainer. If it isn't, something is seriously wrong with the folks making the decisions," says Gregg Brandyberry of GlaxoSmithKline in Philadelphia, an early adopter of e-sourcing technology and a proponent of its benefits. He says GSK recoups its annual investment in e-sourcing almost weekly, a scenario he never would have imagined before signing on. "I'm struggling to think of a way a person could not get a great ROI with e-sourcing. Some companies have tough hurdles for technology investments, like one-year payback. If you can't do that with e-sourcing, you negotiated a bad contract with the provider or you didn't deploy the technology right."

Brandyberry points out that the immediate reaction when buyers hear potential ROI from e-sourcing vendors is to assume their numbers are all sales speak, "but in reality the vendors may be pitching less of an ROI than is possible. This is not your typical technology spend."

So is tracking ROI on e-sourcing still useful? "[ROI] a moot point by itself, but it's a great story when we're trying to get funding for other projects," Branyberry says.

Jason Orsin, director of procurement for ETrade Financial in New York, agrees. "The challenge is always for procurement to prove its value. So any time we can continue to do that we should do it—to prove we provide value through strategic sourcing and e-sourcing. With the level of outsourcing occurring at many companies, it could be procurement next in any company, so you always have to prove your value."

E-sourcing adopters still have to get the buy-in from executives, no matter how many strong ROI stories are out there. Seasoned users have learned that the benefits to e-sourcing go far beyond price in today's market. Certainly there are cost savings to be had through e-sourcing, but the process efficiencies gained are what many new adopters are most impressed with, which can be factored into the ROI equation if tracked correctly.

ETrade has a 15-person internal procurement department that is transitioning from its current functional approach to a more vertical approach where buyers gain more expertise in certain spend areas. ETrade spends most on areas such as real estate, facilities, IT, and advertising. To date, the company has grown by acquisition and its procurement operations have been working "on the fly," according to Orsin. But in January, Orsin came on board and was tasked with standardizing processes, streamlining the sourcing operations and gaining some cost savings.

To that end, ETrade brought in an e-sourcing tool from AT Kearney Procurement Solutions to supplement its existing Ariba implementation. And like any IT project, the e-sourcing software had to be green-lighted and the payback tracked.

"We have an internal committee that works on our IT/technology spend," Orsin says, adding that he is on the committee which he was presenting the business case to. "We have an approval process for any major spend in the IT environment. So I had to come to the committee and sell this tool based on its ROI. I had to outline to them what I was spending, how much the ROI would be and lay it all out. I told the committee I thought we'd achieve ROI with the first event."

Orsin made good on his promise. ETrade held a two-auction pilot with the AT Kearney tool—one for a services contract, and one for software. The first category produced a return on the investment immediately, which relieved the ROI pressure and allowed ETrade to pursue other areas of spend that might not have the highest savings, but could benefit from the e-sourcing process.

Internally, the hardest sell at ETrade was the idea that reverse auctions could be held for services, not just commodities. So that's why, right off the bat, Orsin targeted the temporary labor services spend and held an event for loan origination software.

"We worked with the business owner to identify and agree on requirements, the players and do an RFP," he says. "From there, once we got through the suppliers, we took the rest of the players and auctioned off different components and brought in different noncost components."

Orsin says the process savings achieved in those early events went into the ROI tracking. For example, the temporary labor supplier that won the reverse auction event now works through an online system for significant process savings.

Brandyberry says GSK uses the mantra: "half the resources, twice as fast, twice the savings" when it comes to summing up the nonprice benefits of e-sourcing.

"We often said if we just took one category of spend and looked at the resources needed, e-sourcing takes about half the resources. Then on top of that it accelerates the delivery on sourcing projects so you can do more work faster. So you're accelerating delivery with fewer resources. Those two provide the double-whammy. And then the cost savings lay right on top of that."

Another reason ROI is less of a priority for e-sourcing users today than it may have been in the past is many executives outside of purchasing are more familiar with the technology and its benefits. For example, Orsin says he often uses the expression "eBay in reverse" to explain how a reverse auction works, as most executives are familiar with, if not regular users of, eBay.

"Technology in general got a bad rap [in the late 1990s] because a lot of companies spent a lot of money without proper controls in place and did not see a return," Brandyberry points out. "That had tarnished the whole IT spending area. We have a fairly formal process called a benefit delivery report to track ROI on IT investments, which looks at a number of metrics. GSK's IT organization put a lot of things in place to get money approved, but after the funds are approved, there are specific criteria around tracking benefits."

Art Laszlo, corporate commodity leader at Brunswick Corp. of Lake Forrest, Ill., says when his organization adopted the Iasta e-sourcing software in early 2005, it was not considered as much of a risk as it may have been a few years ago. Company executives were familiar with the technology and showed much less pushback than he expected early on.

"When we originally went to our executive committee, we told them to forget everything they may have heard about e-sourcing in the past. They had confidence that we in procurement knew what we were doing," he says. "They looked at the initial ROI calculation, but they didn't really question it at all. Today, we in corporate procurement track the ROI and present it quarterly to the upper management team."

Acceptance is increasing on the supplier side as well, which helps increase or expedite the ROI figures. Brandyberry says GSK has used e-sourcing in more than 50 countries. One of the fastest growing areas for e-sourcing use at GSK is in the scientific areas which were considered hands-off when the company first adopted the technology. And the more suppliers on the tool, the greater the ROI.

One factor in ROI that may be overlooked, Laszlo points out, is the pricing model for the e-sourcing technology. Brunswick originally spoke with 15 different e-sourcing providers and found the functionality didn't vary as much as the pricing did. Like any supplier evaluation, quality and price factor into the selection of an e-sourcing provider, but the ROI is directly related to the initial price, so it needs to be weighed cautiously, Laszlo warns.

"Organizations need to understand where they are and what they need in evaluating e-sourcing providers," he says. "So when you look at a provider you are not locking into something that you will not need. Some features and benefits may not be needed by some companies. For example, many offer strategic sourcing consulting services, but if your company has resources in place, they will not need those."