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Successful Procurement in the Cloud

By Bill Huber | N/A 2012 | 7 | 5

Implementation and adoption of procurement technology across enterprises can be a challenging proposition as companies attempt to gain comprehensive visibility and management of spend. As the market has evolved, cloud technology is showing great potential to transform the way organizations pay for and use business applications__and may be an attractive option for those seeking a faster path to implementation and adoption of an advanced procurement system.

An on-demand, software-as-a-service (SaaS) platform in a cloud model can deliver business applications in a “one-to-many” model. The results may include lighter rollout templates, a potentially lower up-front investment, and more straightforward end-user experiences, all of which can lead to improved visibility and spend management within an organization. But the most important thing to keep in mind when considering the cloud for procurement activities is that success requires a combined effort among vendors, service providers, and clients.

Procurement has experienced significant changes over the past 20 years, from the development of procure-to-pay applications, emergence of strategic sourcing organizations, and the current growth of source-to-pay business process outsourcing. Broadly speaking, source-to-pay outsourcing involves providing long-term (36–60 months), day-to-day support of procurement and accounts payable sub-processes__for example, sourcing, requisitioning, and invoice reconciliation__for multiple business groups.

After 2005, software providers first began to offer on-demand models of their technology or platforms. Since then, many business processes have started to move from the on-premise model to a business-process-as–a-service cloud model.

SaaS applications are delivered via the cloud using three primary deployment models:

  • The private cloud is used by the organization alone, though it may be managed by a third party.
  • The public cloud includes services that are owned by one organization and sold to the public or a large industry group.  
  • The hybrid cloud infrastructure is made up of two or more clouds (private, community, or public) that, while separate, share a standardized technology that allows for data and application portability.

In the case of enterprise applications (such as Oracle or SAP) or specific strategic sourcing point solutions (such as Ariba, IBM’s Emptoris, GEP, or Iasta), adoption is primarily through a private cloud model, which provides advantages in security and safety. In the source-to-pay environment, earlier “eMarketplace” offerings were designed to be public cloud models, but evolved to become more of a private cloud model, as well.

The source-to-pay process area increasingly is where organizations are adopting on-demand models. As illustrated in Figure 1, these models have been used for business processes including strategic sourcing, procurement, and accounts payable and across sub-processes from spend classification through payment audit and reconciliation.

Figure 1: On-demand modelsOn-demand models

Beyond source-to-pay, cloud-enabled business process outsourcing combines managed services with cloud-based applications as a hybrid offering. This approach enables companies to leverage on-demand resources from providers, dynamically meet peak system demand without investing in local information technology (IT) resources, and have the same provider manage the business services on that technology. This approach optimizes the business process and technology environments.

When deployed in a global delivery model, the cloud enables organizations to outsource the technology (infrastructure, selection, ordering, deployment, and management) and associated business process activities (transaction processing, analytics, and reporting) to locations that offer combined advantages for labor costs and available skills. In the future, application delivery likely will evolve from on-premise to a complete on-demand cloud model, involving both application and infrastructure delivery through the cloud.

The benefits of cloud-enabled business process outsourcing and on-demand source-to-pay processes are noteworthy. The move toward cloud services has the practical impact of enabling service providers to drive standardization across multiple customer environments and make services more utility-like. This means providers can more easily leverage greater economies of scale and deliver significant savings to customers. Additionally, companies can expect increased visibility into spend and a reduced sourcing cycle.

Management and governance
Cloud-based or otherwise, business process outsourcing initiatives cannot fully achieve their goals without companies taking an active role in working with providers to drive process changes and establish effective controls and governance structures. This is even more critical for source-to-pay, which affects change across nearly every department. As companies look internally to determine whether operations and contracts are managed in a centralized or decentralized manner, effective management of these services contracts becomes critical.

It’s often difficult to manage service provider engagements due to internal politics, conflicting department and employee roles and incentives, lack of a consistent governance process, or lack of awareness of the value of a common view. Thus, one of the critical roles of governance in a procurement initiative is to ensure that key decisions on individual category strategies are properly vetted by high-level internal stakeholders, whose support will determine the success of many of the category initiatives.

An internal strategy is required to prevent value leakage. In the case of source-to-pay business process outsourcing, ensuring that different types of work by a single service provider are integrated into one contract will enable a more holistic solution with clearer accountabilities, as well as create common pricing for resources and a single set of terms for working with that provider. The critical factor in sourcing solution design is to ensure that incentives are balanced between quality of goods and services, end-user satisfaction, cost savings, compliance, and efficiency. Using the same provider for the sourcing and category management and transactional components of procurement will best enable the alignment of incentives; however, striking the right balance among critical service levels for each area is a key differentiator between those companies that see mixed results and those that hit a home run.

Keep in mind, though, if historical accidents or a defined strategy has created a multi-service provider environment, the role of internal governance becomes more critical, as the providers won’t naturally have an end-to-end alignment of incentives.

Progress in the cloud
Service providers are continuing to extend the capabilities of software by developing optimized business process services and adding bolt-on technology to base platforms—a capability that is increasingly being leveraged in the cloud. This merging of IT capabilities with procurement processes has made solutions more efficient. Leading organizations are capitalizing on this combination of in-house and SaaS solutions to take advantage of best-in-class technology and augment their spend management initiatives. Procurement professionals have an exciting opportunity to increase visibility into spending, lower its total cost of ownership and cost of operations, and shorten sourcing cycles with these new sourcing and process models.

Bill Huber is partner with ISG, a technology insights, market intelligence, and advisory services company. His areas of expertise include business process outsourcing, procurement, and financial services. Huber may be contacted at bill.huber@isg-one.com

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