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Emptoris "Procures" Zeborg's Spend Management Expertise Part Two: Market Impact

Written By: Predrag Jakovljevic
Published On: November 19 2003

Market Impact

Emptoris, Inc., a privately-held provider of e-sourcing solutions that support the strategic sourcing needs of global 5000 companies, early in 2003 announced the completion of financing from new and existing investors totaling $20.5 million. Menlo Ventures led the third funding round, with participation from new investor HarbourVest Partners and all existing investors, including NETinvest, from the previous two funding rounds. Emptoris then pledged to use the funds to finance further expansion of the company in a number of areas, including sales, marketing, product development, and penetration into new global markets.

Then, in September, Emptoris announced the acquisition of Zeborg, one of the world's leading spend analytics firms. As a result of the acquisition, Emptoris, with more than 50 global 5000 customers and notable sourcing applications and services, believes it is now positioned as the leading strategic sourcing software provider in the procurement and sourcing applications market. In addition to acquiring Zeborg's software and services offerings, Emptoris will inherit the company's sales team as well as global 1000 clients from a wide range of industries, including 7 of the world's largest banking and financial services companies. Zeborg's customers include American Express, Cigna, Fleet Boston Financial Corporation, KeySpan, and Owens Corning. Zeborg has reportedly processed over $480 billion in corporate spend data and over 350 million transactions from over 100 data systems. On the other hand, Emptoris customers include Boeing, GlaxoSmithKline, Motorola, and Samsung America.

It would not be a colossal discovery to realize that difficult economic times with flat and often crippling revenues have particularly forced enterprises to reduce costs in ways other than the "tried-and-true" massive layoffs. Purchasing departments, which have long been regarded as "necessary-evil pen-pushers," have recently come as possibly the first to mind as the bottom line improvement opportunity makers through ensuring sourcing and procurement of all materials (indirect and direct) and services for the organization in a more strategic, streamlined, efficient, and cost-effective way.

Owing to ever increasing deployment of outsourcing, virtual manufacturing, contract manufacturing, vendor managed inventory (VMI) and many other modern manufacturing concepts due to increased global competition and the need for enterprises to focus on their core competencies, enterprises are often spending even over 50 percent of their revenue on procured goods and services. Thus, suppliers' bases have been an ever-increasing factor to every organization's performance. Moreover, suppliers being manufacturers themselves, should be leveraged as a valuable source of expertise instead of being treated as a mere external cost center (if the user companies could even glean that knowledge at all), capable of helping their customers deliver more innovative products faster and at better quality levels, and not necessarily only at lower prices. In other words, the competition has shifted from being between individual companies to being between companies and their value chains.

However, so far the communication between manufacturers and their suppliers has been mainly transactional and at arm's length in nature. As a result, few companies can openly claim to manage their suppliers closely and efficiently, and hence deliberately or not, many continue to put up with being inexplicably overcharged for orders or with accepting late shipments. The situation gets even worse when the enterprises have to discern how much they spend, with whom, on what items, and when.

SRM describes an emerging category of software to manage these evolving relationships between manufacturers and suppliers. Given the relative nascence of the SRM movement, it often means different things to different people. For a detailed discussion of SRM see "The Hidden Gems of the Enterprise Application Space."

The processes that make up SRM depend on a hybrid of technologies and require a significant implementation, data cleansing and migration, and integration effort at most organizations. Still, two underlying results that an effective SRM project should achieve would be 1) the automation of the processes by which a company buys supplies, which can range in sophistication from automated generation of requests for proposals (RFPs) to more holistic order management systems, and 2) to provide the analysis that enables buyers to assess historical supplier data and base subsequent purchasing decisions on the results.

As recap, SRM allows companies to integrate with their most important suppliers to streamline order management, replenishment, and fulfillment, inventory management, and engineering change management (ECM). The key words pervading so far have been sourcing, spend management and contract management. Namely, the core procurement process has become fairly mature and most enterprise application packages provide solid support for the purchasing process.

This is Part Two of a three-part note.

Part One detailed the event.

Part Three will present challenges and make user recommendations.

Strategic Sourcing

To provide a more distinct value proposition, vendors are providing value-added functionality that helps with tasks outside the procurement cycle. The most significant one is strategic sourcing, which, through rating and ranking criteria, a purchasing officer chooses the optimal set of suppliers, with which to negotiate a contract. It enables enterprises to evaluate potential mixes of materials and services and determine appropriate suppliers and terms and conditions to balance cost, quality and risk. The applications can capture supplier information and serve as a medium for collaboration between buyer and supplier on the requirements of the purchasing organization. Generally, the term strategic sourcing denotes many steps that precede the signing of a contract, including spend analysis, identifying potential suppliers, RFQ and contract negotiation, and monitoring and improving suppliers (which logically may happen both before and after the contract signing).

As companies continue to strive to reduce the internal costs of their products and services, more pressure is on the procurement group to source from the right supplier that can deliver as needed, at the right price, but also subject to many other measures some of which can be of a non-quantitative nature, such as product availability, specifications, freight expenses, warranty, terms of contract, distribution partners, and what not. The sourcing equation can become even more complex when federal and state government regulations and corporate mandates such as sourcing from minority-owned businesses are brought into play as thresholds that cannot be circumvented.

Spend management comes in the form of software and services. It allows organizations to gain control of the entire purchasing cycle, since the organizations deploying spend management across their e-purchasing operations should have a much better idea of how their money is being spent. Moreover, they must ascertain how much money is spent and where, before they can identify opportunities to improve sourcing via, e.g., negotiations with the supplier to produce a mutually beneficial contract. Spend management also requires rigid principles and governance to enforce compliance, which means establishing methods of monitoring spending against the budget and providing appropriate alerting and escalation processes for dealing with spending that exceeds budget levels.

Contract management is another key component of enterprise spend management, since contracts are the point around which much of a company's dealings with its suppliers' pivots. Buyers and suppliers can spend an inordinate amount of time figuring out details about obligations and remuneration, incentives, and contingencies. However, for companies handling several dozens of contracts, ensuring that suppliers adhere to contract details is often too cumbersome to be executed. Most enterprises do not have formal systems in place to manage contracts, and thus financial or purchasing executives often do not have visibility into contracts because they are kept in multiple different storage systems or even, as hardly accessible hard copies.

Companies need contract management solutions that can reach across those repositories to help managers gain a comprehensive understanding of the trade agreements under which the enterprise operates. The lack of visibility and control will often cause an enterprise to fail to extract full value from the contract and the relationship with the supplier.

To that end Emptoris's acquisition of Zeborg is both a wise offensive and defensive move, since it combines the resources of two companies that should focus on arguably growing e-sourcing/spend management opportunities. The companies have quite complementary product offerings, industries of focus, and excellent customer references. The merger has some merits similar to the also recent merger of indirect e-procurement counterparts Perfect Commerce and eScout.

Emptoris's Contribution

As mentioned earlier, Emptoris's legacy and core competence lies within the manufacturing organizations and complex decision support for sourcing large numbers of complex direct line items, and in subsequent deriving of awards and allocation strategies. The Emptoris Sourcing Portfolio is a suite of eleven Web-based modules that support the broad sourcing process, from identifying demand to creating contracts, thereby enabling enterprises to identify and prioritize sourcing savings opportunities, negotiate significant cost savings, and track contract compliance and supplier performance. It is a modular solution, enabling users to select the modules they need, and start where it makes the most sense for them, whether it is to address more spend categories on-line, identify greater savings in each spend category, automate more of the sourcing process, incorporate suppliers into the extended enterprise, or leverage best practice processes and content. The modules and some description of how they work follows:

  1. The Item Master module is self-explanatory and it serves the purpose of defining categories and organizing them into an n-tier hierarchy to mirror the taxonomy of goods and services sourced.

  2. The Supplier Qualification module is where sourcing typically starts, with assessing suppliers' capabilities. To that end, users can create questionnaires and scorecards within this module to assess and document a supplier's quality rating, financial stability, and domain-specific certifications.

  3. The Demand Aggregation module, once users have determined which suppliers they are interested in dealing with, helps them gather and summarize their requirements across departments and divisions. This exercise can be challenging, considering the fact that these groups may source requirements independently because they are on different enterprise systems or located in different geographic regions. The module tackles it by aggregating all the requirements while maintaining links back to the specifics provided by each original requestor. For example, a corporation can source centrally but ask its suppliers to drop ship their products to its various plants, and even though it may bid out the requirements based on aggregated demand, it should know and can communicate to the suppliers how the demand is divided up among the plants.

  4. The Request for Quote (RFQ) module allows users to expose their requirements to the suppliers and solicit bids, by supporting a number of different types of negotiation processes, including sealed bids, reverse auctions, and supplier qualification. The module also provides the capability to create RFP templates, so that users can address certain industry-specific requirements through structured data elements, which can be reused in any other template within the suite through the above-mentioned Smart Data feature. For example, if one wants to create an RFP template for the mining business, he/she can structure it so that suppliers must submit information on shipping costs, tariffs, and lot quality. Once those data elements are in the RFP template, that information will be available as structured data for leverage later in negotiations and analyses.

    One of Emptoris's differentiators would be enabling a TCO-based multi-attribute approach, as suppliers are not just bidding on the price, but on many more pertinent criteria. The module also includes a workflow engine to support the organizational hierarchy present in most large companies, as it can specify who is responsible for each category and sub-category, as well as to document who has the right to create, open, close, and approve a negotiation. Once the RFP is populated and it has been decided how to run the event, and all the required sign-offs are obtained, the solution allows suppliers to respond to this information in a possibly unique way, leveraging what Emptoris calls an extended enterprise philosophy, which aims at identifying suppliers' strengths and figuring out how to leverage them. Namely, instead of treating the requirements as fixed, suppliers are encouraged to recommend changes that might result in lower prices. They might suggest that, for example, the customer moves the due dates, allows multiple shipments (back orders), or buys an additional item from them to get a lower price (volume-based or bundled discounts). Many buyers would like to know about these opportunities, given that suppliers can often lower their costs when they are given some flexibility and wiggle space.

  5. The Decision Support module, which leverages scenarios to help users determine the lowest cost of ownership alternative that accomplishes the specified goals. For example, users should hedge their risks by giving one supplier a certain percentage or dollar amount of the business to meet a contractual obligation, or they may want to spread out their orders among several suppliers. They will not consider just price, but will also factor in variables such as quality, suppliers' viability, customer service, and reliability within the scenario. The software, through scientific decision-making optimization, will identify, line-by-line, based on the scenario, the sourcing plan that will result in the lowest cost of ownership. The "what if" scenario simulations are broad, and every time the optimization engine runs again. Each time, the module explains what the contributing factors are for a particular scenario, so that users know what the critical constraints are (e.g., they may get a better price if they relax the due date). The software aim is at helping users understand their trade-offs, which might be a valuable piece of information.

  6. The Standard and Advanced Reverse Auction module enables real time online competitive bidding.

  7. The Contract Management module is a summation of the terms and conditions that were analyzed in the Decision Support module. The rules engine prompts users to address important issues in their contract, such as compliancy, and there is an editing tool so that users can fine-tune the final document. For example, the contract may call for a quarterly review of the elements it was based upon (e.g., price, on-time delivery, etc.). If any of these has changed, the module can be configured to send an e-mail, trigger a penalty or bonus, or initiate a renegotiation, which can be defined upfront, in the business rules engine.

  8. The Supplier Assessment module is a tool to periodically evaluate existing suppliers. It supports lean manufacturing, ISO 9000, and Malcom-Baldridge specifications.

  9. The Executive Dashboard module provides information on how much users spend where, by category, user, or by department. It pulls data from the sourcing events that users run, and it contains an on-line analytical processing (OLAP) tool that can report on data from the spend analysis database. While the users can use spend analysis as the first step to identify which categories to tackle, the module is more aiming at measuring contract compliancy.

  10. The Project Management module sits on top of all the other modules. It provides the capability to manage categories by project, and a resource for best practices, by category. The module may tell users what they need to do and how to do it for peculiar materials. For example, it might advise users what suppliers they may want to consider and what the nuances of the category are, which creates significant efficiencies within the sourcing organization because it can tell a buyer who has never managed certain categories what to do and what to expect.

  11. The Software Development Kit (SDK) module enables organizations to set up data imports and exports to an ERP or other operational system. It provides significant access to all data elements in and out of Emptoris's system through high-level, UDDI and XML-based API calls. The solution does not provide nor does it require real time integration by the nature of transactions.

Zeborg's Contribution

On the other hand, Zeborg offers the combination of software and consulting expertise in tracking indirect materials spending primarily in the financial sector, and especially for complex indirect goods and services, including temporary labor, advertising, and print. It has been providing sourcing consulting engagements for particular spending categories by using its specialized RFX Sourcing Suite to help its clients negotiate a better deal with their suppliers. It has a few dozen pre-built RFX templates, and its real skill lies in helping companies sift out their above-mentioned indirect procurement spending, and then attain savings in those specific categories. Filling Emptoris' spend management capability gap, Zeborg focuses on the front of the sourcing process by providing turnkey data cleansing, cross-referencing and category classification services, and an advanced analytics engine for detailed spend data management and analysis. Its premier module, ExpenseMap, aims at giving a granular view of spending as a means to uncover better supply opportunities, and the solution has also been used to drive compliance efforts.

Prior to being acquired, Zeborg attempted a foray into sourcing execution to help companies reap the savings that they have identified during spending analysis. To that end, the RFX Sourcing suite also provides certain capabilities for discovering the best prices through an automated bid and analysis process, which leads to long-term contracts. However, given it's a matter for an expert's prowess rather than an enterprise application developer, Zeborg's future in developing a single-trick software was dubious, and it was expected the vendor would seek to embed its expertise (captured into a stack of "Excel spreadsheets on Microsoft Visual Basic steroids"), into an enterprise-level sourcing suite that would appeal to the top executives. This is where Emptoris comes into picture, and Emptoris's expert knowledge will likely be further productized into the ExpenseMap templates, process flows, and pre-configured analysis and award scenarios to expand within the Emptoris sourcing portfolio.

Despite the apparent disconnect between two vendors' expertise (i.e., direct materials and manufacturing customers of Emptoris versus indirect materials and service industries of Zeborg), the fact is that manufacturers too have a need for indirect materials procurement, as shown with a couple of Zeborg manufacturing customers like Owens Corning. Thus, Emptoris customers should leverage Zeborg's strong spending analysis technology platform and services capability, and the potential for closed-loop performance analysis that is critical to any supply chain management initiative, whether it is predictive spending in the supply chain or pre-spending analysis to guide all types of requisitions to the right contracts or commodity managers.

This concludes Part Two of a three-part note.

Part One detailed the event.

Part Three will present challenges and make user recommendations.

 
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