How to Buy the Right Procurement Systems16 min read

With the proliferation of enterprise procurement systems available today, buyers are confronted with an anxiety inducing paradox of choice. There are well over 100 procurement software companies worldwide today, each focusing on different parts of the Procurement value chain. Certain larger providers even argue they can be your “one-stop shop” for the entire Procurement value chain. This plethora of options reflects the increased focus on Procurement organizations as value drivers for the business. Generally speaking, this is great news for supply chain professionals. However, it makes buying Procurement systems and the associated Procurement system architecture decisions more complex.

To make things simpler, it is important to understand that there are 3 main categories of Procurement software solutions. These three categories are: ERP systems, Source-to-Pay (S2P) suites & other “best of breed” solutions. Considering each category along with their strengths and weaknesses is important when crafting a holistic Procurement system architecture. More importantly, establishing a strategy at the start of your digital transformation will guide optimal system purchasing decisions. This will preserve precious organizational resources for other impactful initiatives instead of investing in “shelfware“.

The worst outcome in any digital transformation initiative is realizing that backtracking is necessary. It is devastating for morale, disastrous for the pocketbook and cruel to your calendar. Let’s discuss the 3 categories you need to master to avoid this fate:

Category 1 – ERP Systems

The first category consists of traditional Enterprise Resource Planning (ERP) systems. First and foremost, ERPs are designed to support a business’s core business processes. For example, finance, planning, procurement, inventory management, production, sales, HR, etc. The main function of an ERP system is to ensure data integrity between these processes by enforcing their integrated nature. For example, the receipt of purchased goods automatically updates inventory levels. Financial general ledger accounts are also automatically updated to reflect new assets (stock) and liabilities (accounts payable to supplier).

Whether you choose Microsoft Dynamics, SAP, Oracle, Workday, NetSuite, JDE, etc., the ERP system acts as the nervous system of your business. It is always a mission critical system that supports your core functional operations, such as the production of financial statements. In larger organizations, this makes the ERP a non-negotiable building block to consider in your architecture. This dynamic gives ERPs unique characteristics:

Strengths

• Robustness. Leading ERP systems have been around for decades. Therefore, they are extremely robust at all levels (error management, data integrity, security, etc.). They’ve typically also been built natively from the ground up which improves the compatibility and stability of their code base.
• Scope of Integration with Other Functions. As previously mentioned, in ERP systems you can’t carry out operations without automatically affecting other functions tied into your transaction. This ensures information integrity and accuracy across business functions leading to more efficient work flows.
• Good support of direct purchasing processes. In this context, I define “direct purchasing” as the purchase of goods or services where at least one of the following is required to support the lifecycle of the goods/service purchased:
  • A material/service master record
  • Inventory management functionality
  • Integration with Material Requirements Planning (MRP)
  • Integration with maintenance work orders (MRO parts are therefore considered direct in this context)
• Direct procurement is highly integrated with other functions (production planning, inventory management, etc.). Therefore, running your direct procurement processes in ERP is a good general rule of thumb. Of course, as user interfaces are generally less intuitive in these types of systems, you may need to optimize certain parts of the process with additional systems and add-ons(Category 3).

Weaknesses

• User experience. Because of the sheer size and complexity of a typical ERP (e.g. SAP ERP consists of more than 250 million lines of codes developed over 14 years), modernizing the look and feel of such a system is a long, slow and arduous process. Smaller products/companies (as in other categories) have a great advantage on this front because they do not have to consider this baggage when developing new solutions.
• Speed of innovation. Similarly, the integrated nature of these systems makes speedy innovation complex. Small changes can have deep ramifications on other parts of an integrated process. This means that development, testing and deployment of changes is longer than in smaller systems, all other things being equal. However, with the development of cloud ERP offerings from most providers, this is slowly changing. Vendors have tighter control on how the system evolves in customer instances and therefore more flexibility to push updates while controlling the code base.
• Workflows. Typically, when using an ERP, a user will need to be heavily trained to use and navigate through the system ahead of time to carry out processes. As ERP systems are usually transaction-based, users must execute the different transactions that make up their business process sequentially from memory (e.g. create requisition, convert requisition into PO, approve PO, expedite order, goods receipt, etc.). ERP systems do have certain workflow capabilities but they are typically limited to a specific transaction (e.g. PO approval) and do not govern the overarching process end-to-end.

Category 2 – Source-to-Pay Suites

The second category of systems to consider are Source-to-Pay (S2P) suites (and their corresponding Supplier Networks). Today, these systems are almost exclusively sold in a Software as a service (SaaS) model. As opposed to ERPs, S2P systems cater directly (and singularly) to the Procurement and Accounts Payable functions. Their main function is to support the widest variety of Procurement use cases possible to help organizations support the end-to-end Procurement value chain. For example, S2P suites will typically offer Sourcing and/or Contract Management modules which help structure and optimize processes that are typically not well supported in ERP systems.

Whether you choose SAP Ariba, Ivalua, Coupa, Jaggaer, Zycus, etc., Source-to-Pay suites act as a “functionality extender” for your ERP. They support the Procurement and Accounts Payable processes where ERP doesn’t do the job (or does a very deficient job). However, it is important to note that if you do not require support for a direct purchasing process (as defined earlier in this article), you may also be able to carry out all your Procurement activities in a Source-to-Pay system with only minimal integration back to the accounting modules of your ERP.

With this in mind, it’s possible to see why S2P suites have their own characteristics:

Strengths

• Speed of innovation. Given their cloud architecture, S2P systems are evolving very quickly to meet user needs, industry specific requirements and/or integrate innovative concepts, such as Machine Learning, into novel use cases. For example, SAP Ariba is releasing new functionalities every quarter at the time of this writing (vs. yearly+ for the SAP S4/HANA ERP solution). This gives S2P suites the ability to create additional value for Procurement organizations at a faster pace than ERP systems. Their unique focus on Procurement and Accounts Payable use cases only further accentuates this reality.
• User experience. As most S2P systems are operated via a web browser, their user interface is much more intuitive than that of legacy ERP systems. As web applications are now the norm in our personal lives, the learning curve is flatter for new users as they can leverage existing skills.
• Mobile Integration. Along the same lines, because of their web architecture, it is much easier to setup and use mobile apps for S2P systems than it is for ERP. Less technological layers are involved and therefore they require less expertise to implement and maintain.
• Workflows. Source-to-Pay systems take the reserve approach from ERP systems on this front. An end-to-end process workflow guides the user through the end-to-end process in most S2P modules (vs. executing transactions). For example, to run a sourcing event, a user would typically answer a set of questions about his event and be led through a set of tailored workflow items to complete his sourcing event (e.g. find suppliers, prepare tendering documents, send documents to suppliers, collect responses, evaluate and award, etc.). This is one of the great strengths of S2P systems vs. ERP systems. It is harder for users to veer off the established process because of the boundaries established by workflows.
• Modularity. I often compare Source-to-Pay systems to Swiss Army Knives for Procurement. You can pick and choose the modules that generate value for your organization and pay license fees accordingly (e.g. implement only Contract Management but not Sourcing and Procure-to-Pay) . In ERP systems, you will typically have a single license cost for the entire application, whether or not you use all the modules available. Therefore, S2P systems gives you greater flexibility. You can selectively use S2P systems for processes not covered by your ERP.
• Good support of indirect purchasing. In this context, I define “indirect purchasing” as everything that does not fall into direct purchasing as defined above. Typically, this covers purchasing requirements that they are user-driven, ad-hoc purchases. These are good candidates for execution in the Procure-to-Pay module of S2P systems. However, a good Supplier Network solution should be able to cater to all your purchasing needs.
• Sourcing & Contract Management. Typically, ERP systems don’t support Sourcing & Contract Management processes very well (for direct or indirect). Therefore, when looking to support these processes via software, you must turn to S2P systems or “Best of breed” applications.

Weaknesses

• Fragility. In comparison to “older”, robust ERP systems, S2P systems are much “younger”. Therefore, system administration functionality around security roles, error management, data integrity, etc. are less developed and therefore more restrictive and fragile. It is much easier to end up with missing or corrupt data in a Source-to-Pay system than it is in an ERP system.
• Modularity. To further my Swiss Army Knife analogy, it is also possible to unwittingly take out the knife attachment out and to stab yourself with it when implementing a S2P system… Since you can pick and choose the modules you want to implement in a S2P system, you need to ensure you are picking the right ones to marry with your other systems (e.g. your backend ERP). Otherwise, you risk harming your ability to support your end-to-end Procurement value chain. For example, you could end up with functionality gaps and/or duplicate functionality that will leave you in a worse off state than before. Why? Because you will have added complexity and/or manual steps to make processes work that weren’t there before the implementation of a S2P suite.
• Integration with other systems. Any time you introduce additional systems in a technological landscape, you are adding complexity. Over and above the technical challenges that come with integrating systems together, each new system also has their own organizational data structure that needs to be understood and adopted by your business teams. For example, a business unit could be named a “plant” in one system and a “purchasing unit” in another. Users need to know this and to understand the links and nuances between different concepts in different systems. Furthermore, you might not be able to draw 1-to-1 correlations for all concepts in the different systems you are trying to integrate. This potentially means you will need to create data/business rules in the interfaces to ensure each system has the data they need to properly function at a conceptual level. This is getting better as S2P systems aim to provide standard connectors to all big ERP systems and standard APIs that can be called to retrieve/input data to integrate business processes across systems. However, integration of systems remains the most difficult thing to do as you add a Source-to-Pay application in your Procurement system architecture.

Category 3 – “Best of Breed” Applications

Thirdly, you have the best of the rest: “best of breed” systems. In this category, you will find niche systems that focus on functionality that caters only to specific slivers of the end-to-end Procurement value chain. This is also the category where you will find all the innovative startups and niche players trying to apply the following concepts to Procurement applications:

• Machine Learning
• Artificial Intelligence
• Blockchain
• Microservices
• Process Mining
• Market Intelligence
• Data governance & Management
• Ticketing tools
• Career development
• Etc.

These smaller players can both develop functionality for processes already covered by ERP and S2P systems (e.g. Sourcing, Contract Management, Purchasing, etc.) and functionality not covered by other system categories (e.g. Smart supplier master in the cloud, sustainability optimization, commodity market intelligence, etc.). However, to survive, a key assumption must ring true: your “best of breed” solution generates more value in it’s niche scope area than any other ERP or S2P solution. Otherwise, they won’t stay in business very long…

Whether you are looking at systems like Tealbook, Celonis, SirionLabs, etc., including “best of breed” systems in your Procurement system architecture makes sense if it will help generate benefits that can’t be achieved with the bigger, wider scope ERP and S2P systems. However, it is not that simple. You still need to consider your ERP/S2P architecture when looking at these systems as they will most likely be the providers/consumers of data from your “best of breed” systems. Strengths and weaknesses of these types of systems are as varied as the systems themselves. However, there are two specific common characteristics of this category of systems that should be noted:

Strength

• Fit for purpose. A “best of breed” application should cater to an exact need or generate a very specific benefit for a Procurement organization. As it is built for this single purpose, it will do a great job at executing on its promise. If you are not convinced this will be the case when looking at a system that isn’t an ERP or S2P suite, then file it in a 4^th category: systems to avoid…

Weakness

• Integration with other systems / processes. As “best of breed” systems have a singular focus, it is often difficult to integrate them with the rest of your Procurement system architecture (your ERP and S2P suite). This consideration should always be top of mind when looking at systems in this category: How does it fit into the whole? Will it create more manual work? Even if you answer these questions in the affirmative, it might still make sense to include the system in your landscape. However, you should consider the additional operational costs they will generate in your business case. The best systems in this category know integration is often their biggest issue and provide an integration toolbox (APIs, data dump mechanisms, standard connectors for leading ERP/S2P systems) to help with the integration activities. But again, technical integration is only one half of the integration equation. The other half of integration lies in the conceptual integration of the new application into the organization’s processes and jargon.

That’s Great but How Do I Decide Which Procurement Systems to Buy?

Every system added to your Procurement system architecture adds complexity. More complexity means more administrators, more master data, more training material, more interfaces, more support tickets, etc. Therefore, the best Procurement system architecture is as simple as possible to meet the requirements of your organization. No simpler and no more complex. This may seem esoteric but it is a great guiding principle to refer back to when thinking about adding/removing systems.

This means that when in doubt in a purchasing decision, you should err on the side of less systems. That may sound funny coming from someone who implements systems for a living but the truth is that a system is only as good as the process it supports. Chaotic processes supported by systems will produce systematically chaotic processes…

Sequence of System Purchase/Implementation Is Also Important

The sequence of purchase is also important based on the system category characteristics discussed above. Here are some general guidelines to follow in the rollout of your systems:

1. Define, document and understand your business processes before doing anything else. A process culture goes a long way to making system implementations go much smoother.
2. With knowledgeable partners, craft a desired end state Procurement system architecture. This exercise is about marrying internal requirements and constraints with external offerings. It should take into consideration:
   1. Your organization’s purchasing profile (the commodities you buy and processes currently executed)
   2. The strengths and weaknesses of the system categories outlined above.
3. Implement and optimize your ERP first. Remember the ERP is usually a non-negotiable foundational building block that will dictate where you should go from there.
4. Identify process areas that are lacking support or are low performing when supported with ERP.
5. Implement S2P modules or “best of breed” systems to address the identified process areas.
   1. Sequencing S2P and/or best of breed system implementations will depend on data/technical constraints and where the most business benefits lie. In a perfect world, your first implementations will help cultivate savings that can be used on the next initiatives.
   2. When there is crossover between a S2P module and a “best of breed” system in terms of functionality, it is important to note that ongoing system maintenance costs are multiplied based on the number of different systems in your landscape. Therefore, unless there is a “game changing” reason to go with the “best of breed” system, it is best to go ahead with the equivalent S2P module. That is unless you won’t utilize any other S2P modules for other process areas in your desired end state architecture. In this case, you should choose the best solution based on functionality/ERP integration capabilities alone.
6. Bask in the operational glory of your completed Procurement system architecture.
7. Cultivate a continuous improvement culture. Stay abreast of new developments in the Procurement system space to identify new opportunities.

Conclusion

When laid out in the 7 points above, building a sound Procurement system architecture may sound simple. However, it is anything but… This is often a difficult, multi-year process which requires alignment of multiple stakeholders with conflicting interests and views. Therefore, it is essential that you create a plan and ensure stakeholder buy-in before you start making buying decisions. It will be the difference between glory and gory.

Note: I did not include middleware in this article as it is more of an IT system than a Procurement system. However, it is my belief that middleware should be part of any 21st century Procurement system architecture.

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Do you see any other categories that should be included? Would you create subcategories in each main category? Do you see other guiding principles that should guide Procurement system buying decisions? Let me know in the comments.

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Last Updated on January 4, 2021 by Joël Collin-Demers