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- February 06, 2017
- Kendra Von Esh
- IT & Technology
Back in the early ‘90s, ERP systems revolutionized manufacturing and supply chain management, giving companies an automated way manage the end-to-end process of purchasing raw materials to production to shipping to revenue. Today, ERPs have cemented their place as core systems to manage direct supply chain spending, production and financial results.
Because of the millions of dollars of time and resources that companies devote to ERP systems, over the years, ERP software vendors have also tried to address indirect spending—the process for spending on things such as office supplies and basic services that the company needs just to run the business. The thought was that it was a similar process, and with a few tweaks and adds, this functionality could be configured into the existing system.
However, after 20+ years of working with these ERP solutions, companies of all sizes and industries still don't have a clue where their indirect spending is going.
It’s time for spend management—the end to end process for sourcing, contracting, purchasing and paying for indirect goods and services--to move outside of the ERP environment. This is a separate and unique business process, and we now have the technology to support it as such, and not as just a tweak or an add-on to the ERP.
There are three major reasons why this has to happen.
1. It’s generic business process . . .
With a few exceptions for industries that source complex services, indirect spending is not an industry-specific or even a company-specific business process. It’s not even specific to the size of the company. And, it’s not rocket science. It’s mostly just people buying the goods and services they need to do their jobs and keep the lights on.
When you’re managing direct spending in a manufacturing process, you're buying raw goods, parts or partially assembled components that you're going to make into a final product. If I'm a company making riding lawnmowers for example, maybe I buy blades, or I buy steel and make it into blades. I buy motors, seats and steering wheels. Maybe I build the chassis myself, but ship it out for painting.
Everything has to arrive in sequence to meet the production schedule and ship out on time to meet revenue goals. I’ve got to keep track of cost of goods sold and maybe a lot of other data and specifications related to the product for maintenance and compliance. It’s a complicated process, encompassing materials management and production planning, and it is unique to the company.
Indirect spending on the other hand looks pretty much the same across every business. Even when buying very specialized services such as contractors for the oil and gas industry, it doesn’t even come close to the level of complexity of the ERP. It’s a process common to every business, the same as human capital management (HCM), customer relationship management (CRM) and order to cash processes.
That’s why we’re seeing so many companies move to SaaS solutions such as Workday for HCM and Salesforce for CRM. These each cover a standard business processes from end to end, can be deployed quickly, and can be leveraged across all parts of organizations globally and in any industry and easily integrated with the ERP.
2. That requires mass participation . . .
In a manufacturing environment, the complexity and customization of the ERP system is central to its value. But for indirect spending, these are its downfall. These systems are designed for highly-trained, specialized super-users who are going to be in the system all the time, because it’s their job.
But every single person at the company, from seasonal temps to top executives, needs a way to buy indirect goods. ERP systems are horrible for these casual users. By trying to throw this much simpler process into the maze of the ERP system, we've made it difficult for people to find what they need and get on with their job, which is not buying toner cartridges.
The upshot is, they go around the system. Then spending is all over the place and the company doesn’t get the data they need to manage it effectively. To get the efficiency, visibility and savings on indirect spend, everyone in the company has to use the system, which just isn’t going to happen in an ERP environment.
3. And needs to evolve at the speed of consumer technology
Any time you implement an ERP, you need to take a deep breath and hold it, because you could well be running that project for a year or more, stabilizing it, addressing the problems and getting into a steady state. Any time there's new technology that you would like to leverage, you have to go through a rigorous upgrade process, convert all of your customizations, or get rid of your customizations, or re-implement the system out of the box in some cases and start over.
There has to be a pretty darn big business case to go back and ask for another few million dollars to go through that exercise all over again, so ERP is one of those core systems that just doesn't get upgraded much. And it shouldn’t need to be. It’s a system of record.
Meanwhile, the consumer experience for shopping--which is all indirect spending is—continues to evolve rapidly. For example, Amazon is constantly making it easier and easier to buy products online. First it was just online shopping, then Amazon Prime, then one click ordering and now voice ordering through Alexa.
The end game is to have no user interface at all. One day your smartphone will be able to figure out based on your habits what you’ve run out of and it will ask you if you want to order it. Or it will just go ahead and do it for you.
In services, it wasn’t that long ago that you had to go through an agency to find specialized professionals; now all kinds of marketplaces are popping up where you can shop for contractors in any number of fields.
That’s where we’re heading, that’s what people now expect, and you're never going to get that kind of user experience out of your ERP because of the way that those solutions have been designed. SaaS business tools are pushing out upgrades two or three times a year and doing a much better job at technology innovation.
ERPs remain essential for supply chain and materials management, production planning, detailed construction and core financials. But the concept of the ERP megasuite that covers every business process is dying.
We’re seeing that for standard business processes, configurable SaaS solutions that everyone can use do a better job of capturing all transactions, and with them, critical data that can be used to optimize the process. Like HCM and CRM, spend management is a complete business process, one that touches the ERP but should not be bound by its constraints. These other processes have moved outside of the ERP environment, and it’s time for spend management to do the same.
Kendra Von Esh, Executive Strategic Advisor, Coupa
Kendra Von Esh, a former CIO at Veolia, has been a trusted advisor and CIO for the past decade developing value added strategies and solutions transforming businesses with technology. She has experience merging multiple lines of business and rationalizing application portfolios leveraging cloud strategies and solutions, thereby enabling IT to be agile enough to support a constantly changing business landscape.
Von Esh joined Coupa last year to leverage her executive experience and active involvement in CIO communities and industry boards to create inspiring dialogue and change strategies cross-functionally.