Business Issues -> Costs
By: Dana Gardner, Principal Analyst, Interarbor Solutions
Published: 17th August 2011
Copyright Interarbor Solutions © 2011
A number of major trends are changing the finance game for IT leaders, especially in terms of how they operate like a business within the business. There's a heightened emphasis on measuring cost, service management, hybrid computing, and outsourcing that leverage software-as-a-service (SaaS) and cloud models.
There's also a recognition that collaboration and coordinated business processes need to expand to far outside the four walls of the company. IT needs then to increasingly support ecosystems and better apply extended enterprise process governance, while striving to save money.
So how can IT adjust to these financial pressures? What must they do differently? BriefingsDirect recently interviewed an executive from Ariba to learn how CIOs specifically are seeing the world anew financially, and how they can develop mature strategies for making IT more central to helping businesses innovate productively.
Jason Kurtz, Vice President of Network and Financial Solutions at Ariba, is interviewed by Dana Gardner, Principal Analyst at Interarbor Solutions. [Disclosure: Ariba is a sponsor of BriefingsDirect podcasts.]
Here are some excerpts:
Kurtz: We've certainly seen several big changes. One is in the resource-constrained world. There are bandwidth constraints to support business innovations.
When I talk to CIOs, one of the biggest issues on their minds is, how do I make sure I am allocating more of my time and efforts in technology that supports business growth and innovation, versus the maintenance of existing systems? That's very different than the focus that you would have had in years past in terms of driving internal automation. That's one big change we've seen.
Two is clearly the adoption of SaaS technologies and the impact that's having on IT organizations. We see it completely changing the way companies think about IT investment, not just capital expenditures versus operating expenditures, but the roles and responsibilities that an IT organization has and how it interacts with its internal customers within the functional parts of the organization.
Three, I think you referenced it a little bit earlier, is not just a maniacal focus on managing costs, but also the adoption and return on investment (ROI) that is generated from IT investments. There's always been a focus on getting a good ROI, but I think it’s a much more significant focus across the organization on doing that, and particularly from an IT organization in terms of making sure that they have the ability to measure that.
Four was just a focus on inter-enterprise collaboration. Rather than focusing on the internal process efficiency and effectiveness within the four walls of a company, CIOs are starting to realize that the next wave of productivity will be outside their four walls, what some refer to as inter-enterprise collaboration, meaning how an enterprise automates the processes and the way it collaborates with its customers and suppliers throughout the supply chain.
... About 50–60 percent of companies who are moving to a SaaS environment or the cloud are doing it because of the cost reduction opportunities inherent in not having to deploy, manage, and support applications.
Not only do they get the cost benefits of that, but they typically have time-to-deployment benefits and less time-to-realize-value and flexibility benefits that they didn’t have due to resource constraints within an organization. That's a very common trend in the market, and specifically within Ariba’s customers, and we expect to see that trend continue.
Gardner: I'm really interested about this notion about how IT needs to operate more like a business. What is it that IT needs to do in terms of becoming more like some of the other business units or functions?
Kurtz: It starts with a really well-defined set of goals and objectives. Why are we going to undertake something, what are we hoping to accomplish with that, and how are we going to measure that? What are the key performance indicators (KPIs) that we'll be able to track success with.
To your point, there were certainly times in the past when everyone was buying into the latest and greatest technology, or something that was new and cutting edge, and wanted to try and experiment with it. Given the economic times over the last several years, the willingness of companies to just experiment and see what happens is dramatically less, and you see IT organizations taking on a much more ROI-driven approach.
So it's having a very well-defined business case for investments or initiatives that they're taking on, and making sure not only they understand what that business case is, but their internal stakeholders understand what that business case is and are committed to signing off on delivering those resources.
And it's not just an IT approval, but it's a CFO approval in many cases, and they're really holding their internal customers and stakeholders' feet to the fire and measuring on a regular basis what the ROI is for that specific initiative. We've seen a dramatic shift in the governance around that kind of ROI and adoption process with all of the initiatives that we see our customers undertaking, much more so than we would have seen two, three, or five years ago.
Gardner: I've seen where the way that IT is able to cut cost, but also actually increase their influence and impact within the organization, is to identify core-versus-context types of IT activities, and for those non-core ones, look to increasingly outsource or partner.
Kurtz: Again, a trend that fits exactly in line with that is that we see customers taking advantage of the cloud or SaaS, particularly for non-core activities.
Take, for example, integration. Integration is required in today's world, whether you're integrating within your four walls or outside your four walls, but is that really a core competence that you want to have as an organization. Or, do you want to rely on third-party integration as the service solution providers who can usually do the integration work faster, cheaper, and more flexibly? We're seeing that's just one example of ways customers are taking advantage of that.
Also, of course, the solutions that Ariba provides in the spend management space, we're seeing where customers want to focus on the core enterprise resource planning (ERP) capabilities around finance and operations and leverage tools like Ariba's Spend Management Suite to help their organizations buy better and connect with their ERP, but do it in a cloud-type of way.
Gardner: One of the things that I keep coming up against when I talk to folks in IT is that there’s still the manual paperwork at the spreadsheet level, when it comes to managing contracts and licenses and keeping track of use-pattern licensing, and how to charge back for that. It’s a nightmare for them.
Kurtz: We have many customers who use our spend management solutions to manage their IT spend, whether that’s the sourcing and negotiating of hardware or infrastructure or contract labor or software licenses, managing the contracting process and the ongoing contracting lifecycle of that, all the way through the procurement of it and then the relationship management aspects of it. We absolutely support those processes that IT organizations need to manage their cost within their organization.
Gardner: Is IT really a laggard when it comes to automation at this level?
Kurtz: You would be really surprised how much we see in terms of the world continuing to be a very manual set of processes and capabilities. If you look at it not just within IT, but if you take a step back and look at it on a broader basis, across the market, we see 80 percent of business-to-business transactions still completed completely manually. We see 85-plus percent of invoices and payments still being paper based or people cutting checks.
We see the vast majority of early payment discounts are completely missed. Some estimates indicate that 70-plus percent of all early payment discount opportunities, which procurement and other organizations work so hard to negotiate, get missed. The estimate on what this cost companies around the world is $650 billion in economic impact annually.
The very core of this problem is how an IT organization connects their internal systems, most likely ERP, within an organization to the systems and ERPs of their customers and suppliers to automate that supply chain. That’s where the big automation opportunity, efficiency, and effective gains are, or will be, next is just because the proliferation of all the combinations of systems within your organization, your suppliers, your customers.
Just think about the number of combinations that can be and how it can be very, very challenging and difficult to connect those systems into the optimal or most efficient supply chain.
Gardner: For the benefit of our IT audience, tell us about Ariba. How does Ariba take what it does and then apply to IT?
One, by providing technology or applications that have capabilities across each of those functions around buying, selling, and managing cash. Then, we have a community that is part of our Commerce Cloud, as we refer to it. That community includes our network that connect buyers and sellers, whether they're collaborating with suppliers, looking for new business opportunities, or helping to manage their working capital. It's a network that facilitates documents, information, and financial supply chains.
Then, we have a variety of capabilities to help our customers adopt and be successful. Some of that’s delivered by us and some of it by partners who plug into the cloud. At the highest level, that’s a little bit of what we do.
How our IT organization is taking advantage of that I think was your next question. We see a proliferation of organizations taking advantage of the ability to plug into the Ariba Commerce Cloud in different areas.
Some organizations start with our legacy, which is spend management and helping customers buy better, whether that’s identifying savings opportunities, identifying new sources of supply, negotiating better agreements, managing the contracting process, all the way through, procuring solutions, collaborating with your suppliers and receiving invoices back from your suppliers to managing cash, including payment term optimization, invoice reconciliation, and even working-capital management solutions.
Finally, for sellers, it helps create a marketing channel, new business opportunities, improved efficiencies, and collaborating with and transacting with your customers and prospects.
The nice thing about the way Ariba works is that you can plug in and use any of those pieces on a very modular basis as you need them. That’s been particularly attractive to IT organizations for the exact reasons we talked about before, which is looking for very specific ROI and very specific initiatives around their pain and needs within an organization. We've got the flexibility to help solve those on an individual or holistic need.
And 100 percent of what we do is offered through the cloud.
Gardner: We've been describing IT and its relationship to a provider like Ariba through primarily a consumption framework. But it seems to me that there is also the opportunity for IT to take something like the services you offer with your Ariba Discovery and your ability to use the cloud and ecosystem of providers to initiate a process, and then to manage it as a procurement or a supply chain activity.
Kurtz: This is really the next evolution of where companies are going for automation benefits. It's what we think about as extending the ERP into inter-enterprise collaboration. That’s where companies like Ariba can really help IT organizations.
There are some great examples of customers out there who are doing that. If you think about it on the buying side of the world, take a company like Nalco, which is the largest sustainability company in the world. They had really struggled with lack of automation around purchase orders with their customers and then the purchase orders being delivered to their suppliers from Nalco.
They were literally losing five percent of their orders that they just couldn't track being delivered from their organizations to their suppliers. These lost and delayed orders meant that they couldn't bill customers in a timely manner. It meant lost sales. It meant extending "days sales outstanding" and significant customer satisfaction issues.
A team of people were having to call and check on order status and invoice processing payments and payment status, a completely inefficient process between Nalco's customers, and its supplier partners.
By leveraging Ariba Solution and the 'Ariba Network' they were able to collaborate with suppliers and customers to significantly improve their customer satisfaction, reduce "days sales outstanding," and cut headcount that were very involved in working on things that could be easily automated.
Let’s take another example from the side of the business everyone gets most excited about, the revenue growth or sell side of the house. Fastenal is a great example, where an IT organization helps extend the services it provides internally to its customers externally to Fastenal’s customers by leveraging eCommerce and the Ariba Network to connect and collaborate with its customers.
One of the benefits of the extension that Fastenal has done is the ability to collaborate with its customers to provide real-time purchase order and delivery acknowledgements, which have greatly improved customer satisfaction. It has reduced their purchase order error rates by over 80 percent, and it reduced "days sales outstanding" by over 70 percent, a significant working capital improvement.
Other companies are doing the same kind of thing as Fastenal and receiving really good revenue growth or new business opportunities as well. It is not uncommon to see companies like Fastenal finding 50 percent-plus increases in product line cross-sells and up-sells, and seeing even 20 percent plus year-over-year sales growth within existing customers. Then, we have solutions like Ariba Discovery even finding new business in customers that they have never done any business with before.
That’s just an example on the sell side of the house of how IT organizations are extending and can extend the service that they are providing.
One of the most important things to keep in mind is that at Ariba our mission in life is to help extend or complement the ERP investments that many IT organizations have made. We help extend those outside the enterprise and the enterprise collaboration, whether that’s buying, selling, or managing their cash.
You mentioned a few examples of spend management, but also it’s about helping companies sell better, drive revenue growth, and manage their cash better by automating functions like accounts payable and providing benefits to accounts receivable on the sell side.
If you look at it in those terms, we help companies free up their limited IT resources to focus on innovation, not supporting applications or integration or customization, and focus on driving business adoption and leveraging the core internal capabilities of ERP.
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Published by: IT Analysis Communications Ltd.
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