The overdue promise of e-procurement: a new business architecture and an evolutionary business model are necessary for electronic procurement to deliver and sustain the efficiencies that stakeholders require - E-Procurement/Materials Management

Health Management Technology, Nov, 2001 by Lee Marston, Lawrence Baisch

With supplies and services representing the second largest expense category in a hospital's operating budget, procurement professionals are under enormous pressure to reduce cost in these areas. To do so, there are two paths available. One is to lower the unit price paid for those goods and services, and the other is to lower the transaction costs.

New concepts of Internet-enabled procurement began to form as the Internet came of age in the late 1990s. E-procurement was hailed as the breakthrough technology that would help procurement personnel address both cost reduction methods simultaneously.

Since e-procurement came onto the scene in 1997, the promise of this technology has been and continues to be:

* more affordable transaction connectivity using the Internet and XML instead of private Value Added Networks (VANs) and EDI;

* better information delivery via the Internet, creating more immediate access to product content and transaction activity reporting;

* consolidation of common functions across multiple enterprises like shared catalog management, shared contract management and consolidated payment processing.

Promise Versus Practice

Processing transactions via the Internet rather than via EDI-based VANs is expected to reduce the cost of e-commerce by as much as 90 percent. For healthcare providers, better information visibility via the Internet is expected to drive higher levels of contract compliance, product and price standardization, and more streamlined supply-chain management processes.

However, in late 2001, most observers would concede that more talk than transaction has flowed through the Internet-enabled "supply chain of the future." The savings opportunities are still there, but the evolution has been slower than expected--and this has been borne out in all industry sectors, not just healthcare.

There are many reasons for this--immature technology, lack of urgency, threats of disintermediation, the addition of new marketplace middlemen, concerns over e-commerce revenue models and lack of standards, to name a few.

Does this mean e-procurement is doomed never to achieve its potential? The answer is no. The current tactical issues we struggle with will be resolved over time, and service companies that provide consistent value will survive and thrive.

lnternet technology itself is still in its infancy. Concerns over security, stability and standards are starting to diminish. The technology is maturing to a point where we can rely on its new infrastructure for day-to-day business support. A year ago, e-commerce technology providers were struggling just to accomplish an end-to-end electronic transaction with no human intervention. Today, we are processing tens of thousands of transactions each day with no disruptions

Both providers and suppliers need a basic structure to follow when implementing the new business architecture for e-procurement, and need to understand the three "C's" to view e-procurement from a broader perspective.

Connectivity

Early efforts to use the Internet for procurement in healthcare focused on standardizing product catalogs, Web-based desktop ordering (requisitioning) and replacing traditional EDI connectivity with the Internet and XML protocols. These efforts proved to be complex and expensive, so much that only the largest of players made any real progress.

Today, the focus is shifting away from content management and one-to-one connectivity to transaction management and overall marketplace connectivity. The development of Internet technologies, messaging protocols and standards, coupled with significant improvements in transport-layer infrastructure, will make it much less complicated for organizations to migrate more of their business processes to an electronic environment. As more organizations take advantage of the opportunity to automate traditional "back office" or repetitive, high-throughput processes, they begin to reap significant rewards in other ways as well.

For example, by using the Internet to process basic accounting functions such as purchase orders, invoices, and payments (instead of using traditional manual processes), average transaction cost can be reduced from around $1 to 10 cents. In addition, if all steps are processed using software, the information relevant to the transaction can be captured and used for other purposes such as sales tracking, product marketing campaigns and customer information management.

Consolidation

The real value of e-procurement begins to be realized after connectivity and content standardization have been achieved. E-procurement was never just about connectivity and content; these components are utilities, the means to the end. While they are necessary and valuable, they do not create enough value alone to absorb the cost of adoption. In the Internet age, people expect these services at a utilitarian cost level. The real end game is first consolidation and ultimately collaboration.

Economic theory has shown that consolidation is probably the greatest source of value creation in the history of supply chain management. Trying to achieve economies of scale and scope has driven the most visible mergers and acquisitions, and vertical and horizontal integrations in the healthcare landscape. Consolidation is an age-old strategy that gave successful birth to the concepts of wholesale distribution, healthcare provider networks, group purchasing organizations and supplier conglomerates.