The Advanced Sourcing and Negotiation Benchmark Report

The Advanced Sourcing & Negotiation
Benchmark Report
The Art & Science of the Deal

January 2007

- Underwritten in part by -

The Advanced Sourcing & Negotiation Benchmark Report

All print and electronic rights are the property of AberdeenGroup 2007.
AberdeenGroup i
Executive Summary
In retrospect, the initial e-sourcing waves that began a decade ago resembled a corporate
crash diet, leaving an immediate and noticeable impact on the enterprise, but also a
daunting challenge to develop a new and different program that could sustain these bene-
fits and keep the weight off. As the use of basic sourcing strategies has reached satura-
tion levels with certain categories, enterprises must utilize advanced sourcing strategies
across a wider range of categories to deliver the same results.
Key Business Value Findings
Enterprises that employ advanced sourcing strategies are positively impacting product
development cycles and building stronger supplier relationships by making better, more-
informed decisions. They are also driving innovation and to be certain, they are saving
more money than their competitors.
On average, the enterprises participating in this benchmark report:
Identify savings of 11.9% per sourcing event
Realize savings of 9.4% per sourcing event (savings that are actually imple-
mented and realized)
Utilize a formal strategic sourcing process on 43% of their total spend
Utilize e-sourcing across 20% of their total spend
Employ advanced sourcing strategies on 15 to 40% of their sourcing initiatives
Considering the benefits seen by the average e-sourcing program, it is surprising that a
full 36% of this benchmarks respondents (and 20% of all large enterprises) fail to utilize
any level of e-sourcing.
Implications & Analysis
Best in Class enterprises use formal strategic sourcing and e-sourcing processes to drive
greater e-sourcing throughput, achieve higher than average savings, and provide greater
value to the enterprise. They are 32% more likely to employ advanced sourcing strategies
and proclaim a 54% edge in their proficiency. Their superior performance is perhaps best
exemplified by having realized savings results that are 39% better than their competitors.
We implemented e-sourcing in 2004 and began an aggressive program focused on
five indirect categories. We achieved our goals in the first three years. This year
(2007), however, our target cost reduction is lower than what we delivered in 2005
because the opportunities for savings are just not there. We will miss our target
unless we quickly expand our focus and aggressively target another series of cate-
gories for e-sourcing. Director, Strategic Sourcing; Global Engine Manufacturer

ii AberdeenGroup
Table 1: The E-Sourcing Advantage (Best in Class vs. Others)
Performance Area Best in Class All Others
Formal sourcing processes established
100% 65%
% of spend that is strategically sourced
60.7% 39.6%
E-Sourcing application in current use
97% 57%
% of spend that is e-sourced
32.4% 16.2%
Average identified savings (per event)
13.7% 11.2%
Average realized savings (per event)
11.8% 8.5%
% of e-sourcing events using price as sole
award criteria
39.0% 41.5%
Advanced sourcing proficiency (self rating
on scale to 100%)
51% 33%
Source: AberdeenGroup, January 2007
Recommendations for Action
The gradual erosion of savings rates from e-sourcing events that we have seen over the
past few years will continue. The following strategies will help enterprises maximize
their returns:
Develop, augment, or outsource process, category, supply market, and technol-
ogy expertise. Establish centers of excellence for sustainable proficiency.
Employ advanced sourcing strategies across a wider set of categories. Look at
complex categories, including services, logistics, T&E, and direct/strategic mate-
rials.
Focus on realized savings and correlate them to enterprise-level financial metrics
(e.g., EPS).

Aberdeen Group has tracked the usage of and results from e-sourcing since its inception.
This benchmark builds upon those earlier research efforts by examining the opportuni-
ties, challenges, and results of the sourcing programs of over 160 enterprises. Several
case studies are included in this report to provide examples of the different sourcing
strategies that enterprises are employing today to extend the value of their e-sourcing
programs. The findings and recommendations of this report are intended to aid sourcing
professionals drive sustainable improvement through their strategic sourcing and e-
sourcing processes by utilizing advanced sourcing strategies and technology.


AberdeenGroup
Table of Contents
Executive Summary.............................................................................................. i
Key Business Value Findings.......................................................................... i
Implications & Analysis................................................................................... i
Recommendations for Action..........................................................................ii
Chapter One: Issue at Hand.................................................................................1
Technology-enabled Sourcing........................................................................ 1
Advanced Sourcing Primer............................................................................ 2
An Ounce of Prevention is Worth a Pound (or More)..................................... 3
Chapter Two: Key Business Value Findings.........................................................5
No Retreat (Continue to Advance)................................................................. 5
Challenges and Responses........................................................................... 6
Sourcing Excellence...................................................................................... 8
Chapter Three: Implications & Analysis.............................................................10
Process and Organization........................................................................... 12
Knowledge & Technology............................................................................. 12
Strategic Sourcing Automation No Pain, Strong Gains............................. 12
Pressures, Actions, Capabilities, Enablers (PACE)...................................... 13
Chapter Four: Recommendations for Action......................................................15
Laggard Steps to Success........................................................................... 15
Industry Average Steps to Success............................................................. 16
Best in Class Next Steps............................................................................. 16
Featured Underwriters.......................................................................................17
Author Profiles....................................................................................................20
Appendix A: Research Methodology..................................................................21
Appendix B: Related Aberdeen Research & Tools.............................................25


AberdeenGroup

Table of Contents
Figures
Figure 1: Main Pressures Driving E-Sourcing Adoption........................................4
Figure 2: The Return on Advanced Sourcing Strategies......................................6
Figure 3: The E-Sourcing Advantage - Part 1 (Best in Class vs. Others) .............8
Figure 4: The E-Sourcing Advantage - Part 2 (Best in Class vs. Others) .............9
Figure 5: Maturity of E-Sourcing Initiatives in Benchmark Report ......................22

Tables
Table 1: The E-Sourcing Advantage (Best in Class vs. Others)............................ ii
Table 2: E-Sourcing KPIs How Do You Rate?...................................................5
Table 3: E-Sourcing Challenges and Responses.................................................7
Table 4: E-Sourcing Competitive Framework..................................................... 11
Table 5: Extending E-Sourcing Planned Investment in the Next 6 to 18 Months13
Table 6: PACE (Pressures, Actions, Capabilities, Enablers)...............................14
Table 7: PACE Framework.................................................................................23
Table 8: Relationship between PACE and Competitive Framework...................24
Table 9: Competitive Framework........................................................................24


AberdeenGroup 1
Chapter One:
Issue at Hand
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The initial shock to supply market equilibrium created by the early e-sourcing waves
created a crash diet effect for most enterprises: immediate and significant results that
were difficult to sustain.
Sustainable results in e-sourcing are achieved by sourcing teams that leverage a blend
of category, process, supply base, and technology expertise.
Deteriorating supply market conditions and diminishing returns from the re-sourcing of
categories exacerbates the challenge to sustain, much less extend the early successes.
The majority of enterprises fail to source more complex categories.
The advanced sourcing functionality available in many enterprise-level e-sourcing appli-
cations is severely underutilized by sourcing professionals today.

he primary role of the procurement function in strategic business initiatives has
begun to shift in recent times from a singular focus on cost savings/avoidance to
the broader management of supply availability and risk, while still maintaining
competitive cost structures. And though its reported or realized savings notably
lags identified savings, e-sourcing, in the broadest sense,
has generally over-delivered on its promise of savings for
the enterprise. In fact, the general adoption of e-sourcing has
served as the major catalyst in the transformation of many
corporate procurement organizations from traditional back-
office function to strategic business partner. Yet, as the early
adopters return time and again to the same e-sourcing well,
the return on their e-sourcing initiatives has begun to erode.
This, in turn, will slow the future investment in many pro-
curement-related areas and curtail this groups growing visi-
bility across the enterprise.
Technology-enabled Sourcing
Technology-enabled sourcing, or e-sourcing, is the use of
web-based applications and decision support tools to auto-
mate the strategic sourcing (and/or spot sourcing) process.
E-sourcing is most commonly associated with the supplier
negotiation process where a buyer creates an online request
for information/price/quote (e-RFx) or reverse auction that
contains: a) business and category requirements, b) defined
business rules that drive bidding activity and control partici-
pant visibility, c) an opportunity for suppliers to provide the
requested data, and d) an evaluation framework. The relatively high e-sourcing adoption
rates reflect the applications ability to model the traditional offline strategic sourcing
process. Common event or negotiation types include RFI, RFP, RFQ, tender, reverse auc-
T
Competitive Framework
Key
The Aberdeen Competitive
Framework defines enter-
prises as falling into one of
the three following levels of
practices and performance:
Best in Class (20%)
Practices that are the best
currently being employed
and significantly superior to
the industry norm
Industry Average(50%)
Practices that represent
the average or norm
Laggards (30%)
Practices that are signifi-
cantly behind the average
of the industry

2 AberdeenGroup
tions, and one-to-one or one-to-many negotiations. Key to achieving sustainable results
in e-sourcing is the ability to leverage category, process, supply base, and technology
expertise into every online negotiation. Many systems now offer robust knowledge man-
agement capabilities, including RFx template creation, document repositories, and stan-
dardized workflows that enable rapid event creation.
Advanced Sourcing Primer
Aberdeen research has previously shown that advanced sourcing capabilities have en-
abled enterprises to identify on average an incremental level of savings of 12% above
standard price-driven e-sourcing events. The ability to wring incremental value from an
online negotiation justifies a significant investment in these capabilities, be it training,
resources, or the tools themselves. But, the tools and strategies of advanced sourcing and
negotiation can move enterprises far beyond basic price discovery. Advanced sourcing
and negotiation is blend of art and a science, combining business, category, and supply
expertise with leading e-sourcing technology and associated value-based decision support
capabilities including:
Bid optimization, which uses advanced analytical tools to simultaneously nego-
tiate and evaluate complex bid structures against a wide range of interdependent
sourcing objectives, variables, constraints, and scenarios.
Cost modeling, (including total cost of ownership TCO evaluation) which fo-
cuses on identifying and analyzing all of the cost components and associated cost
drivers related to a suppliers bid.
Advanced Sourcing Case Study: Brunswick goes Bowling for Dollars
Enterprise: Brunswick Corporation is a leading global manufacturer and marketer of boats and
other sports and leisure equipment and accessories.
Category: Global Freight spend for 600 shipping lanes and 3 container types.
Strategy Employed: Multi-stage e-RFx, utilizing an embedded optimization engine for decision
analysis.
Description: Brunswick needed a faster, more effective way to source its global freight spend.
Brunswick structured a multi-stage e-RFx that accepted final bids in sealed bid format from 20 sup-
pliers. The sourcing team then utilized the bid optimization engine to create various award sce-
narios for the 6,000+ data points based upon different combinations of allocation and business con-
straints including container size, number of suppliers per region, and cost.
Results: While the award decision was not the lowest cost scenario, significant savings were
achieved. The sourcing team now has a full view into the different cost components of their global
freight suppliers and will be better positioned to track/predict future price movements. The sourcing
cycle time for this category was cut in half and the team now has a template to leverage for future
e-sourcing events in this category. Brunswick also believes that the development of an RFx tem-
plate combined with bid optimization will save the team an additional six months on each future
freight bid.

AberdeenGroup 3
Matrix or tiered pricing for sophisticated bid collection. Tiered pricing captures
supplier bid information based upon distinct volume ranges while matrix pricing
captures different bid pricing based upon certain factors related to a specific bid
item.
Flexible bidding, which enables suppliers to:
o Modify the buyer-defined RFx by suggesting alternative specifications
or substitute materials that reduce costs or increase value
o Vary order quantities to define volume discounts
o Develop a distinct bundling of items to offer a unique bid package
Product lifecycle sourcing (for the design-to-source process) integrates Prod-
uct Lifecycle Management and e-sourcing capabilities on a collaborative plat-
form to enable product teams make sourcing-informed design and engineering
decisions as well as extend the product lifecycle through effective product cost
management.
Team and automatic scoring capabilities place a value on the different price
and/or non-price attributes of a suppliers bid to develop a ranking of all bids.
Team scoring enables individual stakeholders to rate the value of a suppliers in-
dividual bid while automatic scoring rates supplier bids automatically based
upon a pre-defined scoring system.
An Ounce of Prevention is Worth a Pound (or More)
Best in Class CPOs typically prioritize the management of their relationships over cost
reductions. Similarly, sourcing professionals, who live where the rubber hits the road,
deploy sourcing automation to streamline processes first and then to reduce costs. In ei-
ther case, cost reduction is a secondary driver (Figure 1).
Advanced Sourcing Case Study: Fleet Afoot
Enterprise: Food and beverage company

Category: $80 Million in Diesel Fuel

Strategy Employed: Reverse auction and bid optimization

Description: Facing dramatic increases in diesel fuel prices, the sourcing team took an advanced
sourcing approach to managing costs while balancing the needs of 5 separate business divisions.
They conducted a series of reverse auctions by geography that focused on supplier margins and
transportation costs (cost components of delivery vs. actual fuel costs) to capture supplier bids. The
reverse auction results flowed directly into a bid optimization engine which was used to deter-
mine optimal supplier awards given specific business constraints per business unit and location.

Results: The company captured competitive pricing and optimized total cost awards within 3 days.
In an escalating fuel market, they achieved savings on more than half of locations while ensuring all
business constraints were met. The team also gained a much better understanding of the supply
market and the cost structures in this category.

4 AberdeenGroup
Figure 1: Main Pressures Driving E-Sourcing Adoption
27%
27%
28%
30%
45%
68%
0% 20% 40% 60% 80%
Centralize processes
Improve supplier management and collaboration
Improve visibility into sourcing initiatives
Increase spend under management
Reduce supply costs
Streamline the sourcing process

Source: AberdeenGroup, J anuary 2007
Advanced Sourcing Case Study: Going Postal
Enterprise: USPS
Category: $30MM in Pallets to be delivered to 25 unique distribution centers.
Strategy Employed: Flexible bidding with optimization after earlier reverse auction.
Description: The purchasing and supply management team at USPS needed to source its supply
of shipping pallets for 25 DCs across the U.S. After an earlier reverse auction, the category team
felt that there was an opportunity to improve the results based upon their historical offline strategic
sourcing experience. Using the reverse auction as a baseline, USPS created a flexible bidding
event with optimization that enabled suppliers to participate in a second round of bidding where
unconstrained by specific requirements. Suppliers were able to define the structure of their entire
bid and express conditional discounts.
Results: USPS use of flexible bidding with optimization enabled suppliers to define: a) specific
bid bundles, which created new volume discounts, b) production schedule changes c) flexible de-
livery times d) supply locations, and e) payment terms. An incremental savings of 9% was achieved
by allowing the suppliers to define the market for pallets. An additional benefit was a key location
no longer being supported by a single source.

AberdeenGroup 5
Chapter Two:
Key Business Value Findings
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Average identified savings per e-sourcing event has gradually decreased from 14.3% in
2005 to 11.9% today.
Savings leakage continues to present a significant opportunity for procurement organi-
zations as 21% of identified savings is not captured.
36% of enterprises report no current usage of e-sourcing.
Those with active e-sourcing programs only source 20% of their total spend.
40% of e-sourcing events use price as the sole award criteria.

ignificant savings continues to be the headline from the average sourcing team,
even though there is a downward trend overall. While this is a concern, a far
greater one is the prevalence and sheer size of savings leakage that occurs at the
end of the strategic sourcing process. The loss of 21% of identified savings is costing the
average enterprise millions dollars annually and must become a priority of the highest
order.
Table 2: E-Sourcing KPIs How Do You Rate?
Performance Area Average Result
Formal sourcing processes established 72%
% of spend that is strategically sourced 43.4%
E-sourcing application in current use 64%
% of spend that is e-sourced 20.0%
Average identified savings (per event) 11.9%
Average realized savings (per event) 9.4%
% of e-sourcing events using price as sole award criteria
40.2%
Advanced sourcing proficiency (self-rating on scale to 100%) 36%
No Retreat (Continue to Advance)
Countering the significant leakage to some degree is the growing use of advanced sourc-
ing strategies like optimization, complex pricing, and team or automatic scoring, that
have been shown to deliver incremental savings exceeding 10%. Perhaps more impor-
tantly, these tools can enable a more complete bid evaluation focused on identifying the
highest-value versus lowest-cost suppliers. The research also shows that advanced sourc-
S

6 AberdeenGroup
ing strategies are being used to shorten sourcing and product development cycles and to
positively impact product innovation. Table 2 below shows how often advanced sourcing
strategies deliver significant savings and/or drive innovation as judged by the respon-
dents.
Figure 2: The Return on Advanced Sourcing Strategies
43%
40%
41%
27%
35%
20%
28%
19%
17%
14%
27%
13%
27%
19%
46%
0% 10% 20% 30% 40% 50% 60% 70%
Cost Modeling
Multi-stage sourcing
Matrix or tiered pricing
Optimization
Alternative bidding
Flexible bidding
Team scoring
Prod. Lifecycle Sourcing
Significant savings Drives innovation

Challenges and Responses
It is clear that the gains made by procurement over the past decade are significant and
have helped elevate the function within the enterprise. Yet, with increased visibility
comes an expectation of consistent execution and delivery. Long gone are the days of the
conference room pilot with a heavy executive presence and millions of dollars in identi-
fied savings. Many procurement organizations must work in a deliberate fashion to get
their house in order if they are to maintain their momentum and continue to prove out
the benefits of engaging procurement. For those that have just concluded their initial
sourcing waves, that was the easy partthis is where it gets interesting.

AberdeenGroup 7
Table 3: E-Sourcing Challenges and Responses
Challenges % Selected Responses to Challenges % Selected
Inability to engage business stake-
holders to adopt standardized processes
41% Establish standard strategic sourcing
processes
Establish formal strategic sourcing
organization
Set metrics and incentives for business
unit adoption
53%

38%

18%
Lack of executive support for strategic
sourcing
31% Secure executive support for strategic
sourcing initiative
Pilot e-sourcing tool to prove value of
strategic sourcing and e-sourcing im-
provements
Hire experienced procurement execu-
tive to develop/lead strategic sourcing
organization
50%

49%

21%
Lack of strategic sourcing process ex-
pertise
processes
Establish formal strategic sourcing
organization
Use external consulting group to help
develop strategic sourcing process and
program
Hire full time employees with required
expertise
53%

38%

35%

31%
Limited resources to support e-sourcing 27% Hire full time employees with required
expertise
Use On-Demand e-sourcing solution
31%

18%
Overcoming inefficient sourcing process
and disparate or limited sourcing auto-
mation systems
processes
Use On-Demand e-sourcing solution
License an e-sourcing solution for
company-wide rollout
53%

18%
12%
Insufficient visibility into spend data 22%

Adopt spend intelligence technology 28%

8 AberdeenGroup
51%
32% 33%
16%
0%
20%
40%
60%
Advanced sourcingproficiency % of spend that is e-sourced
BIC
All Others
Sourcing Excellence
Best in Class enterprises use formal strategic sourcing and e-sourcing processes to drive
greater e-sourcing throughput, achieve higher average savings, and provide greater value
to the enterprise. They are 32% more likely to employ advanced sourcing strategies and
proclaim a 54% edge in their proficiency in their usage. Their superior performance is
perhaps best exemplified by having realized savings results that are 39% better than their
competitors.
Figure 3: The E-Sourcing Advantage - Part 1 (Best in Class vs. Others)

Advanced Sourcing Case Study: Design-to-Source
Enterprise: Fortune 100 industrial manufacturer

Category: Diesel engine components.

Strategy Employed: Product Lifecycle Sourcing platform to provide a detailed part feature-based,
should-cost analysis performed by a cross-functional team.

Description: The engineering team, facing significant cost overruns and delays late in the design
cycle of one of its main product lines, decided to utilize an analytically-driven Product Lifecycle
Sourcing application to better understand cost drivers of certain parts and determine how to re-
duce those costs through design and requirements modifications, part standardization opportuni-
ties, and additional e-sourcing.

Results: The expanded team analyzed an initial set of key parts and found that 60% of the parts
had significant cost savings opportunities. The cross-functional team was ultimately able to reduce
the annual cost of the parts analyzed by a total of 8%, which resulted in a 3% savings in the total
cost of the product line while maintaining the overall quality of the components.

AberdeenGroup 9
13.7%
11.8%
11.2%
8.5%
6%
8%
10%
12%
14%
Identified savings Realized savings
BIC
All Others
Figure 4: The E-Sourcing Advantage - Part 2 (Best in Class vs. Others)


Advanced Sourcing Case Study: Some TLC for TCO
Enterprise: EMEA-based conglomerate concentrated in consumer packaged goods and financial
services
Category: Processed foodstuffs (private-label)
Strategy Employed: Total Cost of Ownership modeling to understand the cost components.
Description: Conglomerate seeking better visibility into the cost breakdown in the production and
delivery of private-labeled processed foodstuffs to better understand and manage potential price
fluctuations and to determine if they could leverage better transportation pricing for the goods cur-
rently Delivered Duty Unpaid (DDU).
Results: With the help of outside consultants, the company modeled a complex TCO formula
that broke down the cost components into the following buckets that build to a final single price bid
Production cost: including raw material costs, labor cost, and other production costs
COGS cost: primarily overhead
DDU: transportation and other delivery cost
The suppliers were able to place their cost components into an Excel template and upload them
directly into the e-RFx where they had visibility into their current rank in the event based upon a
single all-in-price.
The conglomerate reported significant savings from the process and its category team has ex-
panded visibility into the supply/commodity markets to better anticipate future price fluctuations.
They intend to utilize this strategy across their entire private-label food categories.

10 AberdeenGroup
Chapter Three:
Implications & Analysis
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Best in Class enterprises outperform their peers in many fronts. They . . .
Achieve 39% greater cost savings/avoidance per e-sourcing event
Use e-sourcing for twice as much of their total spend
Apply strategic sourcing practices to 50% more of their spend
Are 32% more likely to employ advanced sourcing
Rate themselves 54% more proficient in advanced sourcing strategies

hile cost savings/avoidance is a major objective of strategic sourcing groups
across enterprises, it is not in and of itself the only metric to gauge overall
sourcing performance. Whether or
not you use Kraljics portfolio
model, the goals and objectives in managing
a specific category will depend on how you
classify it; the type of category it is (strategic
vs. tactical), how it is used (direct vs. indi-
rect), and the quantity you expect to use. For
more strategic supplier relationships, cost
may barely enter the equation. Aberdeen has
therefore identified Best in Class sourcing
organizations based upon their level of proc-
ess automation, process standardization, and
advanced sourcing expertise. Research findings suggest a two-to-one correlation between
an enterprises approach to strategic sourcing and the success of their e-sourcing program
(i.e., enterprises with these characteristics are twice as likely to succeed as their peers).
Table 5 segments e-sourcing users based on their characteristics in four categories re-
quired for effective system usage and increased spend management:
Process The level of sourcing standardization across the enterprise and the
relative maturity of the processes in place.
Organization The centralization of sourcing efforts within the enterprise. Or-
ganizational structure, skills, and decision-making alignment across the com-
pany. Program visibility by executive leadership; business stakeholders en-
gagement.
Knowledge Level of strategic sourcing, category-specific, supply market, and
technology expertise; platform to leverage knowledge across extended organiza-
tion
Technology Existence of sourcing automation, extended strategic sourcing
automation to include spend analysis and contracts; advanced sourcing capabili-
ties
W

We prepare an e-sourcing activity
log that compares actual activity
and savings to budget and is re-
viewed weekly by both our CPO
and CFO. Sr. Mgr., e-Sourcing
Operations, Home Improvement
Retailer

AberdeenGroup 11
We believe that all readers can use this framework to more specifically assess their own
organizations e-sourcing competence and to determine the actions they can take to im-
prove their overall performance.
Table 4: E-Sourcing Competitive Framework
Laggards Industry Average Best in Class
Process

No formal enter-
prise-wide strategic
sourcing process
Processes are fully
manual
No process visibility
Loose processes
employed in certain
instances
Some level of proc-
ess standardization
across enterprise
Processes are par-
tially automated
Some visibility into
process
Strategic sourcing
processes standard-
ized across enter-
prise
Uniform processes
mapped to technol-
ogy for complete
automation
Process compliance
is managed
Organization
Lack of a formal
sourcing organiza-
tion
Direct and Indirect
Materials may be-
long in separate or-
ganizations
Sourcing resources
decentralized
across business
units or region
Direct and Indirect
Materials groups of-
ten linked
Formal sourcing
organization
Centralized capa-
bilities
Direct and Indirect
Materials Groups
aligned and closely
linked
Knowledge
No or limited e-
Sourcing Capabili-
ties
Limited strategic
sourcing capabilities
Sourcing and cate-
gory competence
Lack of advanced
Will leverage exter-
nal support/services
on occasion
Sourcing and cate-
gory proficiency
Platform to leverage
expertise
Emerging advanced
Technology
No or limited ex-
perience with e-
sourcing applica-
tions
Limited use of other
supply management
technologies
No advanced sourc-
ing traction
Some complemen-
tary technologies in
place
Emerging applica-
tion expertise to en-
able the sourcing of
more complex cate-
gories
Extended strategic
sourcing footprint
including Spend
Analysis, E-
Sourcing, and Con-
tracts
Extended advanced
including external
optimization and
PLM applications

12 AberdeenGroup
In each of the above categories, our survey results show that the firms exhibiting Best in
Class characteristics also employ the strategies and approaches discussed below.
Process and Organization
Best in Class enterprises are more disciplined in their management of the sourcing proc-
ess and the supporting organization. They . . .
Work aggressively to develop, formalize
and implement strategic sourcing expertise
Map their processes to available sourcing
technologies
Organize themselves uniformly around
their process expertise, typically centraliz-
ing strategic sourcing groups
Ensure that the level of strategic sourcing
process rigor matches the available opportunity
Engage their design and engineering teams earlier in the product development cycle
to drive greater savings and innovation
Knowledge & Technology
Best in Class enterprises carefully manage critical assets like intellectual property and
supporting technologies. They . . .
Understand that successful e-sourcing programs require expertise across process,
category, supply markets, and technology
Show greater returns from their e-sourcing programs due in large part to their ad-
vanced sourcing capabilities, which enable them to source a wider range of catego-
ries
Are more likely to invest in complementary applications and services
Strategic Sourcing Automation No Pain, Strong Gains
In stark contrast to a streamlined e-sourcing program, the offline five-phase strategic
sourcing process has numerous pain points, among them:
Identifying spend and savings opportunities
Collecting supplier bids
Detailed bid analysis
Manual/cumbersome contracts
Continuous performance improvement and measurement.
Over the past half-decade, more enterprises have begun to treat strategic sourcing as a
holistic process and have undertaken plans to automate these steps and ease their pain.
Lets not forget one of the main findings of this benchmark: that e-sourcing has not fully
penetrated the marketplace and opportunities for growth exist.
Best in Class enterprises are
32% more likely to use ad-
vanced sourcing strategies.
Their higher usage also
equates to higher proficiency
and superior results.

AberdeenGroup 13
Table 5: Extending E-Sourcing Planned Investment in the Next 6 to 18 Months
Technology Solution Area % Selected
Contract management 26%
Supplier performance management 23%
Optimization-based sourcing analytics 21%
e-Sourcing event management services 19%
Spend analysis 17%
e-Sourcing 17%
Strategic sourcing consulting services 13%
Strategic sourcing outsourcing services 10%
PLM (Product Design/Development/Engineering) Tools 8%

Pressures, Actions, Capabilities, Enablers (PACE)
We have shown that there is a clear relationship between the pressures companies iden-
tify and the actions they take, and their subsequent competitive performance. All partici-
pants should examine their prioritized PACE selections and determine whether there are
Advanced Sourcing Case Study: Score!
Enterprise: Broadlane, a supply chain services company focused on the group purchasing in the
healthcare industry
Category: $26 million in I.V. pumps
Strategy Employed: Team scoring for a diverse set of dispersed stakeholders
Description: A need for I.V. pumps arose during a period of rising costs (due to certain pump
components and an updated specifications). An advisory committee charged with requirements
definition and demand forecasting developed a robust teamscoring system that weighted the dif-
ferent clinical, technical, and financial attributes of each bidders pumps. The committee was com-
prised of nurses, pharmacists, physicians, bio-engineers and information technology specialists
from each hospital to review and select the product that met the end-user's criteria for high quality,
safe delivery of I.V. medications.
Results: The clinical stakeholders stayed engaged throughout the entire sourcing process and
were able to evaluate the bids as a team across all of the defined attributes. At the end of the proc-
ess, they implemented a new contract for I.V. pumps that saved 13%. The results achieved from
the team scoring and e-sourcing success allowed Broadlane to ensure that national pricing for their
constituency would remain on par with the 7-yr old negotiated price and added an additional $15M
in contract coverage.

14 AberdeenGroup
valuable perspectives to be gleaned by comparison with the PACE priorities of Best in
Class companies.
Table 6: PACE (Pressures, Actions, Capabilities, Enablers)
Prioritized
Pressures
Prioritized
Actions
Prioritized
Capabilities
Prioritized
Enablers
Lack of formal/standard
strategic sourcing and
e-sourcing processes

Standardize all
sourcing methods
Hire sourcing proc-
ess experts
Leverage third party consulting exper-
tise to develop and implement sourcing
policies and procedures
Slowing momentum of
cost sav-
ings/avoidance from e-
sourcing
Secure executive
support for sourcing
initiatives
Expand the scope
of the current e-
sourcing program
Grow advanced sourcing skills and
apply them across a wider set of cate-
gories
Expertise gap Establish formal
sourcing group
Hire proven sourc-
ing expert to lead
the organization
Leverage solution provider training
programs to provide application exper-
tise (the science) and combine with
incremental sourcing expertise (the
art) gained from team experience,
hiring, and/or third-party tutelage to
develop sustainable advanced sourcing
proficiency
Failure to engage busi-
ness constituency on e-
sourcing program

Develop shared
savings program for
the business that
ensures some re-
tention of overall
savings.
Set performance
metrics for e-
sourcing usage and
success at the busi-
ness-level
Reengage business stakeholders with
basic e-sourcing value proposition;
seek partnership early in the sourcing,
requisition or design processes


AberdeenGroup 15
Chapter Four:
Recommendations for Action
K
e
y

T
a
k
e
a
w
a
y
s

Develop, augment or outsource process, category, supply market, and technology exper-
tise. Establish centers of excellence for sustainable proficiency.
Employ advanced sourcing strategies across a wider set of categories. Look at complex
categories, including services, logistics, T&E, and direct/strategic materials.
Focus on realized savings and correlate them to enterprise-level financial metrics (e.g.,
EPS).

xtending the value of an e-sourcing program requires competence, diligence, and
patience. Almost every business stakeholder and category manager can explain
why their categories are not a good fit for e-sourcing. To be clear, they are
wrong. However, it should also be clear that you need their buy-in for implementation.
Executive sponsorship gets them engaged the first time, while execution with the right
blend of advanced sourcing strategies keeps them coming back.

The gradual erosion of savings rates from e-sourcing events that we have seen over the
past few years will continue. The following strategies will help enterprises maximize
their returns:
Laggard Steps to Success
Evaluate e-sourcing applications to ensure that they offer value to the pri-
mary stakeholders. A robust solution provides visibility into sourcing activity
for the executive, adequate RFx capability to meet the business needs of the cate-
gory managers and sourcing specialists, a collaborative platform for the business
stakeholder, and an intuitive user interface that limits or eliminates the need for
supplier training.
Develop a Quick Wins program to drive early success. Fill your pipeline
with commodities that share the following characteristics:
o One or few stakeholders
o Low complexity with clearly defined specifications
o High spend and/or savings potential
o Near-term contract expiration
Promote your successes and develop a living repository of lessons learned.
Set aggressive throughput targets. Enterprises that gain sustainable e-sourcing
competence generally do so through the sheer volume of e-sourcing activity - full
stop. Invest significant energy in driving spend through your e-sourcing applica-
tion and actively track this KPI.
E

16 AberdeenGroup
Invest more time at the front end of the sourcing process. The process effi-
ciencies from e-sourcing really hit after your event has been launched. Invest the
time you save after launching your event in front end activities like supplier dis-
covery and developing stronger requirements.
Industry Average Steps to Success
Standardize sourcing processes across the enterprise. Process standardization
does not mean doing the exact same thing in every instance. The level of rigor
associated with an e-sourcing initiative should match the value associated with
the opportunity.
Leverage complementary technologies. Spend analysis and contract manage-
ment systems are required to fully automate the strategic sourcing process. Addi-
tionally, utilize knowledge management platforms to retain process, category,
and supply market intelligence.
Begin developing an advanced sourcing acumen. Send staff to training ses-
sions from solution providers and third parties. Assign super-users and allow
them to identify and document best practices.
Best in Class Next Steps
Expand advanced sourcing across a wider set of categories. Target a series of
complex categories and set aggressive throughput targets. Leverage technology
expertise from your solution provider, other customers and your peers.
Focus on realized savings. Measure realized savings and correlate them to en-
terprise-level financial metrics (e.g., EPS). Part of this gap can be bridged by
technology. However, it is also critical to get Finance involved along with other
internal stakeholders so that budget impacts can be assessed and appropriate
changes (i.e., decreases) implemented.
Establish centers of excellence. In order to sustain e-sourcing proficiency it is
critical that sourcing acumen be institutionalized beyond a set of super-users or
category experts. Utilize technology to retain and leverage intellectual property
and establish an organization to be its builder and guardian.


AberdeenGroup 17
Featured Underwriters
This research report was made possible, in part, with the financial support of our under-
writers. These individuals and organizations share Aberdeens vision of bringing fact
based research to corporations worldwide at little or no cost. Underwriters have no edito-
rial or research rights and the facts and analysis of this report remain an exclusive pro-
duction and product of Aberdeen Group.

Located in Indianapolis, Iasta is an employee owned software and global service provider
of e-Sourcing solutions. Iasta helps companies of all sizes and locations make better pur-
chasing decisions about the right product, the right provider at the right price. Iasta has
two primary offerings; the first is its software, SmartSource which allows functionality
such as: spend analysis, e-auctions, e-RFx, project management, contract management
and advanced sourcing optimization in a self-service ASP or SaaS model. The second
offering, SmartSupport, is a mixture of services which include: global software sup-
port, fully managed reverse auctions, training and rollout programs, category manage-
ment and low cost country sourcing. Iasta currently provides solutions for almost 100
clients globally.
For additional information on Iasta:
11550 North Meridian St, Suite 250, Carmel, IN 46032
317-594-8600 or david.bush@iasta.com
www.iasta.com

CombineNet is the advanced sourcing technology company. CombineNets optimization-
driven solutions deliver the absolute best total cost of goods and services based on the
buying organizations unique business needs while significantly increasing the speed and
efficiency of the sourcing cycle. CombineNets advanced sourcing technologies have
widespread application for any complex spend category. The company has extensive
expertise in the sourcing of direct and indirect materials, transportation and services for
CPG and Retail companies through its North American and European offices. More than
50 of the top Global 1000 companies use CombineNet for their most advanced strategic
sourcing activities, with an average return on investment of more than 30x.
For additional information on CombineNet:
Fifteen 27
th
Street, Pittsburgh, PA 15222
(412) 471-8200 or info@combinenet.com
www.combinenet.com

18 AberdeenGroup

Founded in 1972, SAP is the recognized leader in providing collaborative business solu-
tions for all types of industries and for every major market. Serving more than 32,000
customers worldwide, SAP is the world's largest business software company and the
world's third-largest independent software provider overall. We have a rich history of
innovation and growth that has made us a true industry leader. Today, SAP employs
more than 35,000 people in more than 50 countries. Our professionals are dedicated to
providing the highest level of customer service and support.
For additional information on SAP:
3999 West Chester Pike, Newtown Square, PA 19073
1-610-661-1000
www.sap.com

Verticalnet is a leader in end-to-end Supply Management solutions available On De-
mand. With the Verticalnet XE Supply Management suite, large enterprises and mid
market customers can now have powerful On Demand access to the complete supply
management process from spend analysis to sourcing, sourcing to contract and procure-
ment with a comprehensive approach to compliance and supplier performance monitor-
ing. Verticalnet Supply Management solutions provide the visibility, insight, and process
control required to maximize sustained value realization with an optimal blend of soft-
ware, comprehensive services, deep category knowledge, and domain expertise.
For additional information on Verticalnet:
400 Chester Field Parkway, Malvern, PA 19355
1-610-240-0600 or info@verticalnet.com
www.verticalnet.com


AberdeenGroup 19

UGS is a leading global provider of product lifecycle management (PLM) software and
services with nearly 4 million licensed seats and 46,000 customers worldwide. Head-
quartered in Plano, Texas, UGS vision is to enable a world where organizations and
their partners collaborate through global innovation networks to deliver world-class
products and services while leveraging UGS solutions, fulfilling the mission of enabling
them to transform their process of innovation. With UGS Teamcenter for SRM, an inte-
grated web-based solution that transforms strategic sourcing, companies can engage their
entire supply chain in a collaborative environment that supports cost management
throughout the product lifecycle process.
For additional information on UGS:
5800 Granite Parkway, Suite 600, Plano, TX 75024
1-972-987-3000 or info@ugs.com
http://www.ugs.com/products/teamcenter/sol_prod/srm/


20 AberdeenGroup
Author Profiles
Andrew Bartol i ni ,
Research Di rector
Gl obal Suppl y Management
AberdeenGroup, Inc.
Andrew Bartolini is a supply management professional with rich experience in strategic
sourcing, business process transformation, and software implementation. He has man-
aged the design and implementation of strategic sourcing and procurement processes for
companies across a wide range of industries and has directed strategic sourcing projects
exceeding $500 million in total value. His recent focus has been in identifying and lever-
aging world-class technologies to achieve operational excellence within the procurement
and finance functions of Fortune 500 companies. His background also includes extensive
transactional and analytical experience while working in management consulting and
investment banking. He joins Aberdeen from Ariba, where he was a Senior Manager in
its Consulting Practice. He holds a B.A. in Economics from Holy Cross College and an
M.B.A in Finance from Indiana University.

Vance Checketts,
Channel Di rector
Gl obal Suppl y Management
AberdeenGroup, Inc.
Vance Checketts is a recognized expert in the areas of procurement and supply manage-
ment with a deep background in the application of technology and the underlying busi-
ness process. Prior to Aberdeen he was at Oracle where he was responsible for the devel-
opment and sales support of their procurement applications. Prior to Oracle, he held sen-
ior roles managing direct and indirect procurement. He has lectured and published with
various industry organizations, including IFPSM, ISM, and Haas School of Business at
UC Berkeley. He holds an M.B.A. from Brigham Young University. He oversees and
contributes across the entire scope of Aberdeens Global Supply Management research
team.

AberdeenGroup 21
Appendix A:
Research Methodology
n J anuary 2007 , AberdeenGroup benchmarked the Sourcing strategies, experiences,
and intentions of over 160 enterprises across multiple industries and geographies.
Responding supply management executives completed an online survey that included
questions designed to determine the following:
The maturity and scope of sourcing programs and an understanding of how these
programs fit within broader supply management initiatives
The benefits that have been derived from e-sourcing programs and technologies
The application and results of specific sourcing strategies
The current and planned use of related supply management technologies
Aberdeen supplemented its online survey effort with telephone interviews with select
survey respondents, gathering additional information on sourcing strategies, experiences,
and results.
By focusing on the above topics, this study aims to identify best practices and strategies
of top-performing sourcing programs and to provide a basic framework for quantifying
the success of eSourcing initiatives by estimating the operational and financial impact of
adopting such practices. Figure 5 describes the maturity and scope of the e-procurement
deployments participating in this benchmark.
I

22 AberdeenGroup
Figure 5: Maturity of E-Sourcing Initiatives in Benchmark Report
11%
13%
12%
29%
4%
21%
11%
In usefor less than oneyear
In usefor 1 to 2 years
In usefor 2 to 3 years
In usefor morethan 3 years
Havepurchased, but not in
use
Not in use- plan to deploy
within 12 months
No plans to purchaseor
deploy
Enterprises participating in the benchmark included the following attributes:
Industry: Respondents from 32 distinct industries are represented in this report.
Financial services and the public sector represented 9% and 8% of the sample,
respectively. 26 industries each accounted for between 4% and 7% of the survey
sample. These sectors included construction/engineering firms, high technol-
ogy/software, publishing/media, pharmaceutical aerospace/defense, consumer
packaged goods, chemicals, consumer electronics, metals/mining/oil/gas, retail,
telecommunications, manufacturing, and transportation/logistics.
Geography: Fifty-five percent of benchmark participants were from North Amer-
ica. Twenty-five percent of participants were from Europe; 13% were from the
Asia-Pacific region; 4% were from Latin and South America; and 3% were from
the Middle East and Africa.
Company size: Fifty-eight percent of respondents were from large enterprises
(annual revenues above US $1 billion); 26% were from midsize enterprises (an-
nual revenues between $50 million and $1 billion); and 16% of respondents were
from small businesses (annual revenues of $50 million or less).
Job title The research sample included respondents with the following job titles:
CPO, CFO, or other C-level officer (10%); SVP or VP-Level (9%); Director
(23%); and Manager (40%)
Function: The research sample included respondents from the following func-
tional areas: procurement, supply chain, and logistics (76%); Business Process
Management (9%); IT (4%); and Sales (8%).

AberdeenGroup 23
Solution providers recognized as sponsors of this report had no substantive influence on
the production of The Advanced Sourcing and Negotiation Benchmark Report. Their
sponsorship has made it possible for AberdeenGroup to make these findings available to
readers at no charge.
Table 7: PACE Framework
PACE Key
Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions,
capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These
terms are defined as follows:
Pressures external forces that impact an organizations market position, competitiveness, or business
operations (e.g., economic, political and regulatory, technology, changing customer preferences, com-
petitive)
Actions the strategic approaches that an organization takes in response to industry pressures
(e.g., align the corporate business model to leverage industry opportunities, such as product/service
strategy, target markets, financial strategy, go-to-market, and sales strategy)
Capabilities the business process competencies required to execute corporate strategy
(e.g., skilled people, brand, market positioning, viable products/services, ecosystem partners,
financing)
Enablers the key functionality of technology solutions required to support the organiza-
tions enabling business practices (e.g., development platform, applications, network con-
nectivity, user interface, training and support, partner interfaces, data cleansing, and man-
agement)


24 AberdeenGroup
Table 8: Relationship between PACE and Competitive Framework
PACE and Competitive Framework How They Interact
Aberdeen research indicates that companies that identify the most impactful pressures and take the most
transformational and effective actions are most likely to achieve superior performance. The level of com-
petitive performance that a company achieves is strongly determined by the PACE choices that they make
and how well they execute.
Table 9: Competitive Framework
Competitive Framework Key
The Aberdeen Competitive Framework defines enterprises as falling into one of the three following levels of
e-procurement practices and performance:
Best in Class (20%) E-Procurement practices that are the best currently being employed and signifi-
cantly superior to the industry norm, and result in the top industry performance.
Industry norm (50%) E-Procurement practices that represent the average or norm, and result in average
industry performance.
Laggards (30%) E-Procurement practices that are significantly behind the average of the industry, and
result in below average performance


AberdeenGroup 25
Appendix B:
Related Aberdeen Research & Tools
Related Aberdeen research that forms a companion or reference to this report include:
The CPOs Strategic Agenda: Managing People Managing Spend (November
2006)
The Spend Intelligence Benchmark Report (J une 2006)
The Contract Management Benchmark Report: Procurement Contracts (March
2006)
The Direct Materials Sourcing Benchmark (March 2006)
Success Strategies in Advanced Sourcing and Negotiation (J une, 2005)
CFOs View of Procurement: Getting More to the Bottom Line (September 2005)

Information on these and any other Aberdeen publications can be found at
www.Aberdeen.com.

Aberdeens 2007 Global Supply Management Research Agenda is also available.

AberdeenGroup, Inc.
260 Franklin Street, Suite 1700
Boston, Massachusetts
02110-3112
USA
Telephone: 617 723 7890
Fax: 617 723 7897
www.aberdeen.com
2007 AberdeenGroup, Inc.
All rights reserved
January 2007
Founded in 1988, AberdeenGroup is the technology-
driven research destination of choice for the global
business executive. AberdeenGroup has over 100,000
research members in over 36 countries around the world
that both participate in and direct the most comprehen-
sive technology-driven value chain research in the
market. Through its continued fact-based research,
benchmarking, and actionable analysis, AberdeenGroup
offers global business and technology executives a
unique mix of actionable research, KPIs, tools,
and services.

The information contained in this publication has been obtained from sources Aberdeen believes to be reliable, but
is not guaranteed by Aberdeen. Aberdeen publications reflect the analysts judgment at the time and are subject to
change without notice.
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