On-demand brings spend control to the masses

New delivery model lets midsize companies get in the game.

By David Hannon -- Purchasing, 3/2/2006

The customer lists of most procurement software companies have always been a good place to benchmark for best practices. The drawback is that typically only big-budget companies could afford to buy and run those big-budget software packages and pay the big-budget service and consulting fees. But the on-demand delivery model has brought spend management technology to companies that may not have considered or afforded such tools in the past.

Welcome to a new era.

A 2005 Aberdeen Group report found that, "With continued pressures to improve performance and reduce costs, sourcing, procurement, and supply management initiatives and automation investments are now not only a priority but a necessity for midmarket companies...more than half of midmarket companies plan to invest in on-demand solutions and services to improve supply management operations."

To repeat: More than half of midmarket companies plan to invest in on-demand solutions and services to improve supply management operations.

That kind of information was enough to drive spend management giant Ariba last year to begin offering its industry-dominating solutions on-demand. Here's how Ariba CEO Bob Calderoni summed up the move: "While we continue to expand the value we deliver to our long-term enterprise customers, we are now putting powerful spend management results within the reach of every company, regardless of size, so they can better compete in today's global market."

Lou Unkeless, senior vice president of marketing at Ariba, tells Purchasing the move was market-driven, based on three major trends impacting its current and potential customers: globalization, cost inflation and greater emphasis on regulatory compliance.

Ariba expects the vast majority of its customers to migrate to the on-demand model and here's why: "Internally, companies are getting smaller and on-demand spend management requires less domain expertise," Unkeless says. "On-demand can be funded with operational expenditures instead of capital expenditures."

There are some major benefits to buying software on-demand—especially spend management software. Most users cite lower up-front costs and a more rapid installation, which dramatically shortens the time to return on investment (ROI) and makes the internal selling process a lot smoother.

"Budgets are tight everywhere, but we were able to get up and running in a week and were training new users and had suppliers up and running a week after that," says Bill Schrouder, procurement specialist for LeChase Construction Services, a Rochester, N.Y.-based construction firm and user of Procuri's on-demand solutions. Schrouder says the functionality within the tool lets him do more supplier management work than ever before—and for a midsized company like LeChase, doing more with fewer people is a major challenge. Thanks to the low cost of entry with on-demand, LeChase has already achieved two times its ROI and is still counting the savings.

Biotech firm Celera Genomics of Rockville, Md. has an ERP system in place, but did not want to install a large procurement application on top of that. Historically, the company used Web-based supplier tools in its procurement to gain some online buying efficiency without making a major up-front investment.

When Celera came across on-demand SRM tools, it was just what the doctor ordered, explains Britt Yingling, senior manager of procurement and logistics. Celera is using on-demand tools from Sciquest to drive buyers to preferred suppliers as well as monitor contract pricing for future changes, all of which is done more easily in an on-demand environment. Celera's historical spend data resides in an internal database.

"Having the ability to offload the management of the software to another party allows us to focus on supplier relationships and our internal customers—driving buyers to preferred suppliers," says Yingling. "The ease of implementation was a big selling point for on-demand. But it's not just the installation, but the ongoing maintenance costs where you save. Our analysis showed that for installation and year one, the price for on-demand vs. installed tools would be pretty close. But the years down the road would provide the advantage of 10-25% cost improvements with on-demand."

Jim Cebula, director of procurement and travel at Kennametal in LaTrobe, Pa. is no stranger to procurement software. Purchasing readers know him well, from stories and webcasts on Kennametal in the past (see archives at Purchasing.com for more). But lately, Cebula has been evaluating tools not just on their functionality, but on their delivery model and the benefits gained through the combination of functionality and delivery capabilities.

"Users can pilot and implement on-demand tools very quickly. As Internet applications upgrade, the internal IT team does not have to be burdened by those upgrades, either," Cebula says.

Kennametal has used two on-demand spend analysis tools in the past, but now hosts its spend analysis tool behind the firewall due to the size of its spend databases.

"We decided we didn't want just location and item in the spend database, but also cost center and general ledger account information, which increased the size of the database," Cebula says. Hosting the database behind the firewall and using on-demand spend analysis tools to manipulate the data "pushed the limits of the response time over the Internet" according to Cebula. Kennametal did go with on-demand e-sourcing tools from Ketera though, for several reasons, most notably it's not tied to the spend database. "We have a global strategic plan for procurement and with that vision in place we are able to provide the proper scope to many of our business system enhancements."

One of the drawbacks to on-demand tools is the limited amount of customization allowed in the model. Most users say they buy software based on the existing functionality and the lack of customization is not a major drawback. Or as Yingling points out, "Customization of an installed tool is not exactly easy either, and is subject to internal resources."

But if you're an organization that wants a tricked-out piece of software, on-demand may not be for you.

With on-demand, there is a risk that updates to the software can come too quickly and users are not informed or ready for them yet. "The last thing you want is to see a button on your interface and not know what it does," says Cebula. "But that's not typical. Usually any major change or update to the software is communicated well in advance."

Cebula also cautions against implementing on-demand solutions before the internal processes have been reviewed and a detailed plan is in place.

"You can run the risk of automating a 'less than benchmarkable' process," he says. "You need to start with an assessment of your purchasing skill and talent and system capabilities before you endeavor on any specific applications."