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Tracing the History of the Procurement Software Market: From Tools to Value

12/12/2016 By

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I’ve always been a fan and student of history (and in fact picked up a graduate degree in the subject before heading into consulting and later procurement). All too often, I think we fail to appreciate the lessons of the past. This is especially true when it comes to business, where memories are often the shortest of all.

This three-part series traces the evolution of the procurement software market with a focus not on modules and applications, but on the ways in which we actually use technology to generate value. I will explore how solutions have progressed over time, not only as technology has gotten more sophisticated but also as the procurement function has evolved and new expectations have been placed on it by the business and shareholders alike.

My hope is that in sharing at least a few lessons from the past, we can be more effective today in buying the right solutions and for the right business reasons.

Part 1: A Brief History of Procurement Software

The history of procurement software as we know it goes back longer (surprise!) than some of the millennials in the workforce today. In fact, the true first productivity tools for procurement started during the era of floppy disks and early hard drives, each of which had a fraction of the memory and storage of today’s smartphones.

The Era of Spreadsheets and MRP/ERP

While we could debate the specifics of when the first procurement technology was put into the buying field (beyond calculators), the first procurement productivity application used by a previous generation of buyers was arguably the spreadsheet. As we’ve written about before on Spend Matters, this started with the introduction of spreadsheet applications like VisiCalc (1979), SuperCalc (1980), Lotus 1-2-3 (1981) and finally, Excel (1985).

Unfortunately, spreadsheets remain the core technology OS for procurement in far too many companies still today, which in part speaks to their success and ubiquity. From a procurement perspective, spreadsheets became a Swiss army knife of sorts to manage everything from tracking supplier bids to managing inventory to ensuring that submitted invoices were in line with contract terms and conditions.

Around the same time as the early spreadsheets, we also began to see the rise and ubiquity of early manufacturing resource planning systems (MRP) and the eventual combination of this set of technologies with enterprise resource planning (ERP) systems to track and manage core business accounting. Together, these solutions would create the source data, rules and mappings used by business functions; manage core transactions within an organization (e.g., inventory); and serve as a system of record for accounting for business activities. In effect, ERP and MRP systems served as the first automated tools for managing transactional data, controlling inventory and providing electronic inputs to manage both purchasing and accounts payable.

Taken together, the spreadsheet and ERP/MRP era represented a giant leap forward to enable procurement to fulfill its historic role more efficiently for the business, ensuring that the proverbial production line stayed open (i.e., supply assurance) and that organizations did not overpay for given SKUs or services (i.e., cost management).

The Applications Era

If we fast-forward our history lesson to the mid 1990s, we enter a new era of procurement software with technologies developed specifically for the function. This included:

  • Early e-procurement applications, which in theory would let both procurement and business users buy more easily from approved suppliers and reduce maverick purchases
  • Reverse auction and eRFX applications to negotiate more effectively with suppliers and control the sourcing process
  • Contract management tools to enable the authoring and oversight of procurement and other corporate contracts
  • Spend analytics to provide insight into spending and help target and prioritize savings opportunities

In short, the applications era, which is still playing out today, put increasingly targeted tools into procurement’s hands, aimed at automating, managing and improving functional requirements.

In the past decade, the application era has given rise to the era of procurement technology suites, which combine elements of different modules, now spanning additional areas. These include supplier management, project management, procurement/supply (not just “spend”) analytics, e-invoicing, supplier network/connectivity, receivables/payables financing (including invoice discounting) and more.

In reality, the early suite era was really just “Version 2.0” of the applications era, an important step forward for orchestrating different activities together and, increasingly, taking advantage of the same underlying master data sets. But there are vast differences in how suites work (and don’t work) together that we’ll explore throughout this series.

Different Systems for Different Needs

A key element that came with the advent of specialized procurement solutions and later, procurement suites, was the ability to align a new set of procurement requirements and expectations with specific technologies. This then enables the procurement function to generate value beyond just supply assurance and achieve baseline savings targets and cost avoidance.

One way of looking at the alignment between new expectations and requirements put onto procurement and new technologies builds on top of earlier system of record notion, going back to MRP/ERP — spreadsheets were never a true system of record, or at least they were never designed to be — is to explore different procurement “system” types.

Different systems include the following.

  • Systems of analysis: for example, spend analysis solutions (and broader AP, procurement and supply analytics) fit well within this category
  • Procurement systems of record: these include SKU-level information as well as transactional insight (e.g., line level invoice data) typically not available from ERP/MRP
  • Systems of engagement: these include e-sourcing tools, contract management solutions and supplier management technologies to drive collaboration with internal stakeholders and suppliers
  • Systems of agreement (internal): these include master data management (MDM) capabilities to create standardized views and records of supplier data across systems
  • Systems of agreement (external): to drive transactional standards and connectivity, including the ability to enable straight through processing of PO, invoice, goods receipt, ship notification and other messages and outputs (e.g., invoice approval) between procurement and its suppliers

Adding it Up: Tracing the Evolution of Procurement Technology To Date

We can sum up the evolution of these application and system types quite easily, including how they correspond with the value expectations put on procurement and the type of value procurement was actually able to generate at different stages of its history.

In short, early technologies helped us “hack data” initially to identify and implement new types of opportunities. And integration with ERP systems and specialized transactional solutions helped procurement improve control and financial linkages.

These types of solutions also helped manage and simplify complexity. They provided a common interface and map for procurement to the general ledger, entities and cost centers to control, map, record and manage buying and budgeting activities. And they provided single (and later integrated) process-oriented capability in such areas as sourcing, spend analysis and supplier management to support specific initiatives (e.g., driving cost reduction requirements or hitting supplier diversity goals).

The combination of these solutions would ultimately provide and enable what we can label as “E³ + M.” Or:

  • Efficiency of process, systems and teams
  • Enablement of the procurement function (linked to new business outcomes and expectations)
  • Effectiveness (also tied to organizational productivity and efficiency)
  • Measurement for reporting on the function and, ideally, driving continuous improvement

If we take the equation “E³ + M = modern procurement foundations,” we would not be telling the whole story of the evolution of the function and the nuances of even how procurement technology has continued to evolve. Next in this series we’ll investigate how the definition of procurement has evolved and how even newer technology models are helping us reimagine what is possible for procurement today. Stay tuned!