What Is the ROI of a Procurement System?
When making any kind of a decision about digital transformation, people like to talk about the Return on Investment (ROI). What is the ROI of a procurement system? How can we think quantitatively and qualitatively about the costs and benefits?
Imagine Betty Buyer. Her CFO tasked her with finding a new procurement system to replace the email and spreadsheet approach they used previously. The CFO is still reeling from the supply chain disruptions that led them to miss revenue targets during the Pandemic (and in its aftermath, too). She has to do this even as she is trying to keep her head above water and deal with crisis after crisis: trade wars, Pandemic disruption, inflation, worker shortages, and war in Europe.
How should she think about the procurement system decision in a way that will make sense when she presents it to the CFO?
How can Betty find the system that will have best ROI?
One way to think of return is as the excess benefits we obtain in the future over the cost that we pay today per unit cost.
Betty needs benefits to exceed costs. She also wants to be efficient.
What system will maximize benefits over cost for a dollar of her IT expenditure?
When we are thinking about a procurement system, we also need to think about the procurement business process.
What are the benefits from our overall approach to purchasing?
People tend to focus on transaction costs and purchasing cycles. How much does it cost us to purchase something, as a percentage of the total contract value? How long does it take us to buy the goods or services we need?
What is the total cost of the procurement system and the procurement business process?
How many people do we need to allocate to the purchasing process?
Supplementing the procurement staff there are often other stakeholders in the ultimate decision. We’ve talked previously about the evolution of the buyer’s journey. A big part of the way we do business now is developing consensus across a broad internal group.
We need to think more broadly about benefits and costs.
In terms of benefits, it may be easier to talk about lower transactions costs because those are easy to measure.
In addition to transactions costs, we need to calculate opportunity costs.
Are we surfacing a diverse array of supplier proposals, so that we optimize for problem-solution fit? Or is our procurement system just speaking to the usual suspects?
Are we driving competition on price, or do we transparently fail to attract enough bidders? Does this lead us to overpay?
Does our procurement process have the ability to obtain market intelligence quickly and inexpensively? Are we writing RFPs that attract suppliers? Or are we writing incoherent, disjointed solicitations that turn suppliers off?
Do we enable stakeholder engagement in a way that permits faster, deeper consensus?
We should think about risk-adjusted ROI, really. The supply chain disruptions of the past two years have reminded us of the folly of a single-minded pursuit of lower cost.
Here are some of the questions we might want to ask ourselves in accounting for risk.
Does our approach to procurement and the system we use reduce the risk of supply chain disruption? For example, it might enable us to onboard suppliers more quickly or develop better relationships with them. After all, buyers with good supplier relationships had better outcomes when things tightened. Also, we may have access to better information with which we can assess the likelihood and impact of bad events.
Were we able to improve the quality of our product because of improved procurement? Did this lead to increased marginal sales?
What about innovation? Studies have shown that much of a company’s innovation comes from or through partnership with its suppliers.
There is a tremendous turnover in the procurement department these days. Older people are retiring. Younger people are replacing them, only to be disappointed by the technology on offer. Would it be easier to recruit topflight talent with the right procurement system?
We’ve built something interesting at EdgeworthBox. It’s a platform that helps business-to-business buyers purchase the right solution, from the right supplier, at the right price.
We’re different two ways: in terms of our technology and in terms of our business model.
We bring a set of tools, data, and community that have been proven to work in financial markets. We haven’t seen other procurement systems that combine a social network with structured data and standardized vendor onboarding for a simplified experience. People use us to replace email and spreadsheets or they use us to augment their existing systems by broadening the conversation around procurement, both internally and externally.