E-sourcing could transform Indian business, government

A silent but determined revolution sweeping across the country has transformed India into one of the fastest growing B2B markets in the world. Such has been the impact that many private organisations have made it mandatory for their suppliers to embrace e-sourcing. But the real surprise could be the impact of e-sourcing technology on purchase decisions in corruption-ridden state-owned firms, says Srikanth R P

Just three years ago, Tata Motors was reeling under losses of about Rs 500 crore. Today, it has regained its former glory and is one of the top ten vehicle makers in the Asia-Pacific region, with profits of close to Rs 300 crore. How did this stunning turnaround come about? While most would say a resurgent economy and booming business—the company did take some bold moves to reduce costs. One of these bold moves towards cost cutting was e-sourcing, a concept that has become a mantra today and is credited as one of the major factors in Tata Motors’ astonishing turnaround.

Ravi Kumaraswami of FreeMarkets feels that the e-sourcing scenario in India is very exciting as the industry is poised to grow at a rate greater than 50 percent

Tata Motors has saved more than Rs 100 crore, thanks to e-sourcing and has conducted close to 300 auctions with the help of e-sourcing major FreeMarkets. Fact is, quite a few Indian corporates are looking at e-sourcing as a strategic initiative. Take the case of Dabur, a traditional Indian company that has built its expertise by leveraging India’s vast heritage in Ayurveda. Dabur’s first e-sourcing project, held in January 2002, was novel in more ways than one. The product being sourced was saffron, which was traditionally purchased from cultivators in Kashmir who were not the ideal candidates for a technology-driven process. Not only had the Internet not reached the region but some of them had never seen a computer in their lives. To explain the concept of e-sourcing, FreeMarkets flew the suppliers down to its office in New Delhi and explained the process to them.

Today, with the help of FreeMarkets, Dabur has already conducted projects worth close to Rs 150 crore. The e-sourcing concept has caught on and today Dabur uses the same technology to source products like herbs, honey, spices and even packaging. While till date Dabur was restricted to the domestic market for sourcing of its products, the e-sourcing model has extended Dabur’s reach to international vendors. Today Dabur has not only managed to save costs by close to 8 percent but has also managed to bring in transparency in the complex, fragmented market for herbs. The aggressive bidding by many vendors has cut costs massively and company sources say that Dabur has already saved close to Rs 2.5 crore by adopting e-sourcing practices.

Tata Motors and Dabur are just two players on the illustrious list of more than 300 Indian players who have adopted e-sourcing practices to cut costs and bring in transparency. And players like FreeMarkets are seeing growth rates of more than 100 percent year-on-year.

Says Ravi Kumaraswami, senior sales group director, FreeMarkets, “The writing on the wall is clear. Supply chain managers are recognising the power of technology-based sourcing, which has grown in volume to Rs 10,000 crore in India. The estimates of further growth range from 30-80 percent by Nasscom-McKinsey to 50-70 percent by Goldman Sachs and as much as 175-200 percent by A T Kearney-IDC. Based on these forecasts, it is safe to assume that at the very least technology-based sourcing is expected to grow at a rate greater than 50 percent. Clearly, this makes the e-sourcing story in India a very interesting one.”

Kumaraswami says that FreeMarkets typically advises firms to go in for e-sourcing only when cost savings are in multiples of the cost invested by the company. With average savings of close to 15-20 percent, it is no wonder that many Indian organisations are signing contracts with e-sourcing solution providers. In India, FreeMarkets has conducted transactions worth more than Rs 5,000 crore, with savings of Rs 700 crore generated for customers. The fact that India is becoming bigger on the radar screen of global e-sourcing technology providers can also be seen from the increasing contribution of revenues sourced from India. For instance, almost all the major players have been recording growth rates of more than 100 percent year-on-year.

Wipro 01markets, another significant player in the Indian e-sourcing scenario, has a similar tale to tell. Says Pradeep V Bahirwani, head–Global Sales, Wipro 01markets, “As of today we have conducted over 500 sourcing events spread across 150 categories and have sourced over Rs 7.2 billion worth of goods for over 100 customers.”

Why has e-sourcing succeeded?

Pradeep Bahirwani of Wipro 01Markets believes that the manufacturing sector will continue to be a big sector for e-sourcing vendors as typically out of every rupee that a manufacturing organisation spends, 50-55 paise is spent on procurement of direct and indirect materials

When the concept of e-sourcing first came to India, many players were sceptical about the viability of the concept as they related the concept to online marketplaces. But e- marketplaces were primarily portals floated with the assumption that thousands of buyers and suppliers would come and do business on the Net. This idea failed as companies rarely dealt with unknown suppliers. But unlike e-marketplaces, e-sourcing is a buyer-driven process where service providers like FreeMarkets and Wipro 01Markets work with the customer to get suppliers who meet their business needs. By getting more suppliers to jump into the fray, e-sourcing not only offers immense cost savings and transparency but also a huge reduction in the time to arrive at a particular price—as suppliers keep bidding and beating down prices.

Over here, it is important to note that the success of the e-sourcing initiative also depends on the quality of the database of suppliers the e-sourcing vendor has. For instance, before entering the Indian market FreeMarkets spent more than a year in creating a database of suppliers to cater to different business segments.

Another important reason why e-sourcing has succeeded in India has been the timing. For instance, around three years ago, the Indian economy was in turmoil and most Indian corporates were looking at cutting costs to survive. The e-sourcing majors realised that if they missed this opportunity, they would perhaps never get such an opportunity again. During the initial days, most e-sourcing players encouraged corporates to do pilot projects and pay them only if they succeeded. Today as most Indian organisations have started drawing global plans e-sourcing is no longer something to experiment with but a critical necessity.

e-sourcing grows up

Manish Gupta of IndiaEngineering says that his company has saved the Kalyani group of companies around 12 percent on a spend of Rs 300 crore through e-sourcing

As more and more Indian companies are getting familiar with the concept of e-sourcing, they are spreading it to other categories. Let’s take another look at the poster boy of the Indian e-sourcing scenario, Tata Motors: In the first year the company started out with simple items like oils, lubricants and fasteners. As confidence in the medium grew, the company added complex materials like castings, injection mouldings and sheet metals. Now close to 20 percent of its purchases happen through e-sourcing.

Another interesting trend that is being seen from the experiences of Indian corporates has been the extension of the concept of e-sourcing to non-core areas. Many Indian organisations are taking advantage of the concept of e-sourcing to source food materials for staff canteens to booking rooms in hotels. Kumaraswami says, “The concept of e-sourcing can be applied for everything from direct and indirect materials to even services. The limitation is only in the mind.”

e-sourcing is also happening through the reverse route and helping Indian suppliers access global companies. In the auto components industry many small and medium enterprises have been able to tap global giants to source their requirements. Today, many small Indian auto component players are being invited to participate in auctions. Previously, the same vendors could not even dream of getting an audience with global clients.

The costs that can be saved through e-sourcing has even prompted large organisations to float their own e-sourcing companies. The Kalyani group has set up an e-sourcing company called IndiaEngineering. Besides saving the group precious money, the initiative also gives the group the opportunity to offer this service to other companies.

Says Manish Gupta, CEO, IndiaEngineering, “We aggregated and negotiated the requirement of fuel oil for seven manufacturing units of the Kalyani group of companies. On a spend of Rs 30 crore, we were able to save around Rs 1.5 crore. Till date the Kalyani group has been able to save around 12 percent on their entire spend of Rs 300 crore that was routed through us.” The success of this initiative can be seen from the fact that Indiaengineering has been clocking growth rates of more than 60 percent per annum for the last three years.

As mentioned earlier, e-sourcing is not being seen not only as a tool to reduce cost but more as a strategic initiative. For instance, Indiaengineering managed to source a critical component that was considered obsolete ten years ago, for one of its clients. The component was not only sourced at 10 percent of its cost but more importantly, the client was able to avoid a major production loss.

Says Kumaraswami of FreeMarkets, “Contrary to popular perception, technology-based sourcing such as online auctions help evaluate key attributes other than price as well. These may include quality, service capability, production capacity, delivery, payment terms and past performance.”

Impact of e-sourcing on state-owned firms

Scams involving government firms have now become so common for the average Indian that almost no eyebrows are raised whenever a newspaper headline screams of a new scam discovered. Hence, while state governments are eager to push forward e-governance plans—the initiative for implementing e-governance is lacking. There are two clear reasons for this. The first one is obvious. Most politicians do not want to usher in a fully transparent system wherein they would lose control of processes and also potential for under-the-table money. The second reason is more practical. Many state government firms are reluctant to take e-governance initiatives as they feel the return on investment on such initiatives is just not there. But unlike other initiatives, e-sourcing can give phenomenal returns on investment within a short time-frame.

A white paper on e-sourcing by the International Association of e-government professionals in association with the US-ASEAN Business Council throws up several interesting facts that should be an eye-opener for Indian government administrators. Though the report has studied the impact of e-sourcing on five countries in Asia (Indonesia, Malaysia, Philippines, Singapore and Thailand), it contains pointers on how a country like India could benefit.

A quote from a Gartner analyst in the white paper shows the significance of e-sourcing for countries in Asia. The analyst believes that the benefits of e-sourcing in the Asian marketplace extend far beyond the cost savings that can be generated through the introduction of competitive bidding. For instance, the disciplines associated with e-sourcing will lead to a re-examination of questionable and inefficient procurement practices. The analyst observes that in the Asian procurement environment, supplier selection has historically been based on the quality of personal relationships and questionable dealings rather than objective criteria. In contrast, e-sourcing enables purchasing organisations to create acquisition processes that are transparent, efficient and measurable.

Interestingly, the report also shows how e-sourcing helps in increasing a country’s GDP. Using data on key economic indicators in the five countries studied, it shows how a government can cut expenditure in functional areas like defence, education, health, housing and economic services like agriculture, utilities, transportation and communication. The analysis of the impact of e-sourcing shows that the expected savings on goods and services when competitive bidding is used is as high as 16 percent. The average is sometimes as high as 35 percent in some areas like general public services. One significant example is that of the National Housing Authority in Thailand, which conducted an online auction to award construction contracts for low-cost housing. The project worth a quarter billion Baht and resulted in cost savings of 17 percent.. Think of the impact such a process would make in India where a significant percentage of the population cannot dream of a shelter above their heads. The savings achieved through e-sourcing can then be utilised to contribute to substantial improvements in public finances and increase national GDP through effective public sector spending. Further analysis of the data shows that the five countries studied on an average could have reduced their national budget deficits or consequently increased their national budget surplus by 16 percent using e-sourcing.

Small beginnings

The e-sourcing scenario in the government sector in India is almost non-existent except for a couple of forward-looking state governments like Andhra Pradesh. The AP government has directed four state departments to use e-sourcing strategies for making purchases. Depending on the success of the e-sourcing initiatives in the four departments, the initiative will be extended to 150 more departments—whose procurement initiatives are estimated to be close to Rs 8,000 crore. Even a 10 percent reduction in cost would mean a phenomenal Rs 800 crore in savings. C1 India, the e-sourcing solutions provider for the AP government, is now keen to extend its solutions to other states by forming a JV with the AP government.

Another notable example is the Karnataka State Police Housing Corporation (KSHPC). The corporation was looking for a new service provider to host its website and provide connectivity solutions. Unlike the past, the corporation decided to go in for an e-sourcing initiative to locate a service provider. In came Wipro 01Markets and trained suppliers to bid online. The corporation, which had budgeted Rs 35 lakh per annum for the service ultimately got the deal signed at a low Rs 7.8 lakh per annum. The organisation has roughly saved Rs 10 crore through e-sourcing practices and today is convinced about using e-sourcing for all its purchase requirements. With a positive experience, the organisation is now looking at placing orders worth Rs 100 crore online and hopes to achieve a minimum 6-7 percent in savings.

While state governments can benefit through e-sourcing, there is another large sector that is waiting to go the e-sourcing way but is confused because of no clear guidelines from the government. State-owned PSUs like ONGC, BHEL, BPCL and IOC spend billions on purchasing their products physically. Think of the savings if they convert to the e-sourcing way of buying. The irony here is that many of these PSUs participate in online auctions as a supplier and not as a buyer. Unless there is a clear directive from the top, these-state-owned PSUs will continue to source products the traditional way—the expensive way.

Besides usual benefits like cost and speed, e-sourcing can also help in cutting down corruption as the entire system is transparent. Recently there were reports stating that the Indian Railways wanted to implement a system of e-tendering railway works contracts to keep away the local mafia who prevent other bidders from even submitting their bids. As the process would be centralised, this would go a long way in reducing corruption.

Growth drivers

In India, one of the early adopters of e-sourcing have been traditional sectors like manufacturing. But market players believe that this sector still holds immense potential. Says Pradeep Bahirwani of Wipro 01Markets, “As a thumb rule it is seen that out of every rupee that a manufacturing organisation spends, 50-55 paise is spent on procurement of direct and indirect materials. Hence any kind of savings can significantly impact the bottom line of these organisations.” The next big sectors for e-sourcing solution providers in India would be sectors like textiles and the government.

Key challenges

One of the biggest challenges e-sourcing vendors face is telling a well-entrenched supplier that he may lose the business. Most suppliers are not comfortable with this paradigm shift in doing business. Companies must also realise that the lowest price is not always the best price and must reflect the value addition that the e-sourcing vendor provides. Another big challenge for e-sourcing solution providers is to provide a high quality database of suppliers for specific industry segments.

Conclusion

While the seeds of a promising technology have been sown in the private industry, the biggest beneficiary of e-sourcing would be the government, especially if it wants to ensure growth for the country instead of a few individuals. India, which ranks 83rd in the Global Corruption Index based on a survey of 133 nations, definitely needs to change a lot of things if it hopes to shine in the near future. The e-sourcing way offers a ray of hope—but will the Indian government see the light?

srikanth@expresscomputeronline.com