Acquiring Minds

Acquiring Minds

Ever since its $1.9 billion acquisition of GIO Insurance last year, AMP has been locked in a struggle to find ways to harness the extra purchasing power that comes with integrating two massive companies. At the same time, the financial services giant has become even more determined to be at all times a creative and disciplined user of technology.

Now AMP hopes to further both goals, with a major e-procurement initiative expected to transform the company's corporate-wide purchasing capabilities and systems by the end of the year. The initiative will allow all AMP's Australian employees to purchase goods and - more unusually - services electronically. "AMP is looking to reduce costs, and this is all part of that drive to be more efficient," says chief financial controller Geoff Richardson. The project has three main objectives: minimise disruption to the business, maximise acceptance and long-term compliance, and support the delivery of identified and sustainable business benefits.

It's rare for traditional corporate procurement practices to be anything but frustrating, laborious and costly. In AMP, as in most other organisations, labour-intensive manual and paper-based purchasing processes have always imposed a heavy administrative burden. In fact, before e-procurement, AMP purchased the goods and services needed to run its businesses from more than 6000 suppliers. This required it to process more than 210,000 invoices a year. It believes e-procurement initiatives will reduce the invoice-processing load to a fraction of what it once was.

AMP expects its e-procurement partnership with PeopleSoft to do more, giving it huge efficiency gains and lower costs by dynamically linking its buyers with a range of suppliers in an open and real-time trading community. Through e-procurement, AMP wants to ensure it has a Web-based means of submitting requests, exchanging specifications, and receiving and approving quotes.

It expects to capture substantial cost savings across the group on an annual basis; develop key supplier partnerships across all commodity groups; transform sourcing and buying into a strategic function; and, facilitate online, real-time purchasing with latest pricing. It will do this with low implementation costs compared to the annual savings it hopes to achieve. "I think the payback of the project was months," Richardson says. "So we'll cover the cost of the project within the first year, but then the savings we lock in are obviously annualised going forward."

According to AMP chief financial officer Marc de Cure, the AMP system will allow reduced process costs and provide a faster, more efficient service for both AMP and its suppliers, as well as an enhanced ability to control and track purchases and monitor expenditure. "The e-procurement initiative is a part of AMP's overall strategy to be a creative and disciplined user of technology, and is an important step for the group in actively managing its costs and supply arrangements," de Cure says. "Importantly, this initiative will lead other such arrangements for our New Zealand and UK businesses in the future."

Captured Savings

Experience has shown most of the cost benefits from e-procurement are internal, due to tight supplier margins. Internal cost benefits tend to come from streamlining the purchasing process. Richardson agrees.

"Most of the savings will come from using fewer suppliers, having it all done electronically: desktop ordering, desktop approval, even electronic payments," he says. "Some of the statistics we found when we did our diagnosis of where we were buying our goods and services were quite amazing in terms of the number of different suppliers you use and the amount of invoices and paper you end up handling over a year."

AMP also wants to go further than other e-procurement initiatives launched to date. As numerous organisations in various industries have implemented e-procurement solutions during the past five years, new areas of cost savings have emerged. As a result, AMP plans to advance the state of the e-procurement art, looking to extend it to a range of critical business processes. Most e-procurement activities are targeted at buying non-production goods, mainly maintenance, repair and operating (MRO) supplies, and office products. However, the AMP initiative goes a step further, extending functionality to allow it to use e-procurement for a range of services including recruitment and professional services.

According to PeopleSoft representative Murray Sergeant, the company is focusing on extending e-procurement far beyond MRO to incorporate areas like providing employee superannuation, providing travel and expense confirmation and purchase, and professional services.

AMP says the decision to go with PeopleSoft was a natural one. "We've put in their ERP backbone throughout Australasia. We're looking at building on that platform, and their e-procurement system just seemed a natural extension of that."

End of the Purchasing Department

It seems certain e-procurement is set to profoundly transform the entire marketplace, with some analysts even predicting e-marketplaces will kill off the traditional purchasing department by 2002. Online procurement systems automate the process of ordering supplies and approving payments. They let employees browse product catalogues. They list the preferred providers offering negotiated group discounts to the organisation. They can even be set up to allow different buying privileges for different employees.

Using the system, AMP employees will be able to buy 20 commodities - from stationery through car hire to recruitment - for business purposes, at highly competitive terms, on their desktop computer. Staff will access the catalogues of preferred suppliers and quickly and efficiently search, order and initiate payment for goods and services. Richardson says there's been a "very favourable" response from suppliers.

Now the company expects e-procurement to slash costs - to some extent through reductions in net pricing, but largely via process cost savings. "We've had pretty open communication with our suppliers," Richardson says. "They're aware of the fact that we want to achieve more efficient processing: paperless processing that works better for them, works better for us." The next step is to set up panels of suppliers, who will all be given the message that AMP expects to receive better prices in return for putting more of its business into fewer hands.

While some analysts have pointed out that unless everyone can be shown to win from the e-procurement system, it is likely to be seen as marginalising the value of the individual supplier. Richardson says AMP is confident it can create a win-win situation for suppliers. "If you look at some of the major suppliers where we have a huge spend, we've gone through a rigorous panel selection process. We have given most of our current suppliers an opportunity to come back to us with a proposal. We've looked at those proposals and put together arrangements that are acceptable to both the suppliers and us," he says. "At the end of the day, it gives [suppliers] more surety of the business and hopefully more efficient processing too."

However, he says while some of the anticipated savings will come from having fewer suppliers, the real cost savings will come from having all purchasing conducted electronically, including desktop ordering, desktop approval and even electronic payments. High-Level Sponsorship Conventional experience makes clear that IT initiatives work best when they are driven from the top. Richardson says the e-procurement initiative has the sponsorship of the managing director and the chief financial officer. "In fact, before we actually kicked off the project, we had all the senior management in the room together and we went through what we proposed to do and got their endorsement of it and their support." He says involvement at business-unit level has also proved critical to the 40-week project, particularly from a compliance point of view.

"The way we structured the project was to set up a steering committee with the overall sponsor being the chief financial officer, and the day-to-day running of the project delegated to me and my team," Richardson says. "We put together a steering committee that consisted of representatives from all the main stakeholders: the business units, corporate office and some of our information technology people."

He says buy-in from senior management will be crucial as the company develops mechanisms to capture desired efficiencies. Once AMP has set up the panels and its electronic catalogues, it aims to ensure a high degree of compliance with both. To that end, it is setting up both a strategic sourcing team and a supply management team dedicated to ensuring compliance.

It is also placing heavy emphasis on communicating its plans broadly within AMP. Corporate media manager Justin Kirkwood says AMP intends to escalate the conceptual understanding of strategic sourcing throughout the group, as the e-procurement system itself comes into effect.

"This will involve communication exercises such as internal test groups, internal simulations, face-to-face briefings for those with sourcing responsibilities, online and hard copy literature to promote the concepts and systems, appropriate media briefings, and internal customer feedback and monitoring systems. All these, of course, will be endorsed at the highest level of the organisation (from CEO) given its strategic importance to AMP," Kirkwood says.

The group has also taken the stance that people need to understand how the project is progressing. It makes ad hoc announcements when milestones are achieved, and uses a thermometer-like chart to monitor savings. "That way everybody can understand what the goal is; as we get a win, the thermometer moves up closer to that goal, and I think that the visual impact of that is very strong," Richardson says.

The chief financial officer is also kept well briefed, as is the managing director, and the group did a brief presentation to the AMP board at its last board meeting.

Meanwhile, Richardson says that while the initiative will ultimately become a significant change project for AMP, the barriers so far have been relatively few. "You inevitably get a little bit of resistance to any sort of change," he says. "By buy-in and open communication we've largely managed to overcome that.

"If you can actually demonstrate this is a [positive outcome] to bottom lines at the end of the day, you can generally persuade people it's a good idea. AMP has gone through a lot of change in the last few years; the culture of AMP now is more to embrace change for the good rather than to resist it."

Selling the e-procurement message has also been relatively easy, Richardson says. Ultimately the project will enable AMP to grow and make it both a more profitable and more efficient company. That's a message everyone can understand.

The Future of Purchasing

AMP was one of 14 leading Australian listed companies that announced in July they planned to form the corProcure online procurement market. Analysts expect more than $8 billion to be spent on inter-company purchases of indirect goods over the next two years on this market. Other players in the cross-industrial site include Australian Postal Corp, ANZ Banking Group, Coca-Cola Amatil, Telstra, Foster's Brewing Group and mining giant BHP.

Australian businesses spend more than $300 billion annually on indirect goods and services, and the 14 founder companies of corProcure say the marketplace would be open to other buyers and all suppliers regardless of size or location. The companies, each of which is a shareholder in corProcure and a member of the board of corProcure, have announced they expect to save between 2 per cent and 15 per cent by buying through corProcure. Most of them expect savings to be at the lower end of the range.

According to the companies, the electronic exchange will be open to all small, medium and large companies who wish to participate in the opportunities offered in the B2B marketplace. The founding shareholders share the investment cost of e-procurement infrastructure.corProcure's services will span the entire supply chain, from suppliers to manufacturers to retailers, and provide procurement, vendor and product catalogues, reverse auctions and online order management. It will allow both buyers and sellers to conduct business in a paperless environment using a common catalogue that will encourage standardisation and allow participants to access and trade with a greatly expanded customer base.

PricewaterhouseCoopers (PwC) has been appointed partner of choice for strategic sourcing and procurement. PwC and corProcure say they're working closely together on implementing a business model, including supplier and buyer engagement, revenue streams and operating rules.

Interim CEO Cameron Moroney says corProcure was the result of the 14 companies sharing needs, resources and knowledge to develop Internet-enabled procurement solutions more powerful and relevant than they could achieve individually. "corProcure will increase efficiencies in the supply chain and thereby reduce transaction costs," Moroney says. "It will encourage suppliers to become e-capable, spread infrastructure costs, help buyers have access to more suppliers and suppliers to reach more customers, and will deliver better prices from collective acquisitions where possible. It will have particular relevance for businesses in rural and regional Australia because it will deliver these benefits to suppliers regardless of their location.

"As well, we believed our collective strength would allow us to direct the business development process to ensure an e-marketplace model relevant to the commercial needs of buyers and suppliers. We are both suppliers and buyers in our own right, and this gives the corProcure team a collective insight not capable of being delivered in other formative structures," he says. "Throughout the process of establishing corProcure, we have maintained our commitment to this collective model, and it will drive our business as we go forward."

The company hopes the initiative will transform procurement practices in Australia, create new value for buyers and suppliers, and give all participants an improved competitive footing in the regional and global economy.

"Buyers will benefit from simplified ordering processes and improved order accuracy," the corProcure Web site announces. "Examples of goods and services traded through corProcure may include office and cleaning supplies, fuel, energy, telecommunications, facilities management, human resources services, legal services, promotions and advertising, computer services, insurance and capital expenditure items.

"corProcure is committed to the development of an open-platform, standards-based, multiple-industry regional trading network that delivers real value and benefits to all participants and stakeholders."

AMP chief financial controller Geoff Richardson says as soon as its e-procurement software is up and running - certainly before the end of the year - AMP plans to link that through to the corProcure site. However, analysts believe most of the company's efforts and anticipated savings will come from its internal initiative, rather than the corProcure site. In addition, they say the corProcure venture will account for little more than 1 per cent of the nation's industrial expenditure. - S Bushell

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