What are the major differences between running your procurement operations in ERP, S2P suites or a best-of-breed digital procurement tools?
For folks like me, who are deeply involved in the procurement tech space, the answer is clear.
However, to anyone who’s just getting started on this topic, the terminology may be confusing.
You may be aware that they’re different. But perhaps you don’t really understand how that impacts your sourcing decision when seeking out the best procurement software for your organisation.
Don’t worry, we’ve got you covered. And we’ll keep it simple. No consultant-speak I promise.
What is an ERP system?
An Enterprise Resource Planning (ERP) system is a comprehensive software suite designed to integrate and manage core business processes in real-time. Typical modules in an ERP are finance, human resources, manufacturing, supply chain management, inventory management, and customer relationship management (CRM).
ERP systems streamline operations by centralising data and automating workflows. The benefit is to enhance efficiency, data accuracy, and decision-making across an organisation.
Major players in the ERP software market are:
SAP, founded in Germany, renowned for its robust ERP solutions catering to large enterprises globally.
Oracle offers a wide range of ERP applications known for their scalability and integration capabilities.
Microsoft Dynamics 365 provides ERP solutions that seamlessly integrate with other Microsoft products, and has more reach into to mid-sized businesses.
Workday, primarily known for its Human Capital Management (HCM) solutions, also offers a cloud-based ERP suite, particularly focused on HR, finance, and planning.
NetSuite, now owned by Oracle, is a cloud-based ERP solution that is particularly popular among small to mid-sized businesses, offering a scalable solution that grows with the company.
Sage is known for offering flexible, cost-effective ERP systems that are well-suited for companies looking for a simpler, more affordable solution.
You’ve also got more established industry-specific solutions such as Infor and Epicor too.
These companies dominate the ERP market due to their extensive functionalities, scalability, and ability to adapt to diverse industry needs.
All of them, however, share a common issue. They’re not really suitable for running strategic procurement activities.
How is ERP different to a source-to-pay suite?
Unless you’re issuing manual POs through Word or Excel, your default position in procurement is most likely using your ERP system.
Cloud-based ERPs are slowly taking over on-premise ERPs, as is evidenced by SAP’s push to move customers onto cloud S4-HANA. Nonetheless, this is a long game. Major ERP implementations are costly IT projects. This won’t happen overnight. On-premise ERP systems, even with all their disadvantages, are certainly going to be around for a while.
ERP systems also have dated interfaces and do not feel user-friendly. You’re likely to require extensive training to use them for more than just a few basic transactions. This is especially the case if you use them for reporting.
ERPs are designed for the whole enterprise. Because of this, Procurement was a bit of an afterthought. Many of these systems were designed in the 1990s, when procurement was still essentially a back-office function. This is reflected in their lack of strategic procurement capabilities.
It’s not very effective to run procurement entirely in an ERP system. These systems have little procurement-related capability beyond just day-to-day operational purchasing and tactical sourcing functionality.
This is usually adequate – although not great – when it comes to managing direct materials. These spend categories are dominated by repeat POs and relatively predictable volumes. Direct spend also requires colleagues from stores, logistics and production planning to have visibility of the POs and volumes too. This fits into an ERP’s enterprise-wide access and integrated workflows.
The challenge comes with indirect spend. Much of this consists of one-time buys. And even if it’s a repeatable spend item, indirect purchasing usually is quite sporadic and less predictable.
In addition, you also have complex and highly strategic services spend, which requires a different approach to what can be offered through a traditional ERP system.
And that’s before we talk about the price.
ERP systems are legacy tools, very highly priced and intended to be the fulcrum of an organisation’s tech stack. We can’t label them as “procurement technology”, as they barely serve the needs of a modern procurement team.
What is a full Source-to-Pay suite?
S2P suites, on the other hand, are exclusively cloud-based.
Source-to-pay software handles everything from the sourcing process, right the way up to invoice payment. We cover the major differences between procure-to-pay, source-to-pay and source-to-contract in two separate articles.
In summary, source-to-pay enables strategic sourcing and supplier selection at the upstream end. On the downstream end, it still covers payment and the transactional side of day-to-day purchasing.
Coupa offers a cloud-based source-to-pay suite that provides end-to-end procurement solutions, focusing on indirect spend management and supplier collaboration.
SAP Ariba delivers a comprehensive procurement platform ideally suited to SAP ERP users that connects buyers and suppliers to optimise sourcing, procurement, and supplier management.
GEP provides an AI-powered procurement suite that helps businesses optimise sourcing, procurement, spend management, and complements their business process outsourcing (BPO) offering.
Ivalua offers a single tenant global procurement platform designed to drive collaboration and transparency in all areas of procurement spend, including direct materials.
Zycus provides a suite of procurement solutions that support end-to-end procurement processes, including supplier management, sourcing, procurement, and spend analysis.
Jaggaer offers a comprehensive source-to-pay suite, with a strong representation in manufacturing businesses and the higher education sector.
Generally speaking, full stack S2P suites target enterprise customers or the top end of the mid-market.
Solutions offering Source-to-Pay for SMEs can’t usually be considered “full stack” because of their slimmed down features.
You’ll also find niche specific source-to-pay solutions for different geographical regions and industry sectors, as well as company size. There is definitely something out there that’s more tailored towards your unique, specific needs.
But are you clear what those need are? Maybe a full suite isn’t what you need after all…
What does a source-to-pay suite do better than ERP?
Their biggest pro is that they are designed especially for procurement and accounts payable teams, whereas ERP systems are designed mainly for finance, sales and operations.
Their biggest advantage is their more advanced capabilities when it comes to handling indirect spend.
S2P suites enable procurement teams to conduct strategic sourcing events for more complex requirements. Whereas your ERP system can only really handle a typical 3-bids-and-a-buy scenario.
You won’t need to do the analysis offline in email and Excel, as you would with ERP systems. The advantage here is the data this brings you at your fingertips.
All of your procurement team’s historical sourcing events are in one central repository, rather than someone else’s C-drive or an under-utilised SharePoint site.
The capabilities and features of their sourcing modules will vary greatly from one S2P suite to another.
Some of them will offer pretty advanced e-auction functionality. Others will focus more on non-price factors and regulatory requirements.
What about the payments and invoicing?
If we now look downstream towards the payment end of the S2P process, there are also some major advantages over ERP. Source-to-Pay suites will typically have supplier portals. These enable vendors to transact automatically with you when it comes to key purchasing processes and accounts payable automation:
- PO acknowledgements and amendments
- Goods receipts
- Invoice posting
- 3-way matching
- Invoice queries
- Early payment discounting
- Automated payments
ERP can only do this with very limited functionality.
Clearly, there are many advantages of taking procurement out of ERP and into a source-to-pay system. So, why do specific best-of-breed or point solutions as digital procurement tools exist on top of this?
What are the disadvantages of Source-to-Pay suites?
Their obvious flaw is that as procurement becomes more multifaceted, it’s inevitable that one piece of software cannot cater to every single function.
The disadvantage of source-to-pay suites is that they’re jacks of all trades, but masters of none.
They do a lot of things reasonably well or kind of okay. But “better than an ERP system” doesn’t necessarily mean good or best-in-class. They’re trying to cover a broad spectrum of needs and features. As a result, their individual modules typically aren’t as good as a point solution.
For example, if you went out and bought a procure-to-pay software and a separate e-sourcing tool and spend analytics platform, you’re going to get more features for roughly the same price point, or even less, than one of the large suites.
There’s no right or wrong approach here.
Your strategy should depend on:
- Organisational philosophy
- Procurement maturity
- Capabilities within your team
- Level of centralisation within the company
- Influence and mandate within the organisation
- Budget
- Resources available for implementation
Point solution e-sourcing tools are pretty much plug-and-play. P2P, on the other hand, will require some significant integration with your finance and inventory systems.
We covered sourcing and P2P as the two major components here, but what about other procurement tech applications. The more complexity in your organisation, the likelihood is that you’ll need additional tech on top.
With this in mind, let’s look finally at how this can be added.
What is a best-of-breed or point solution?
A point solution or best-of-breed technology refers to a specialised software that addresses a specific function or process.
These solutions are typically used by organisations that want best-in-class capabilities for a particular task, often integrating them with other systems to cover the full source-to-pay or source-to-contract cycle.
Large, enterprise level source-to-pay suites don’t offer this comprehensive additional functionality beyond their core features.
The most commonly sought additional modules and features usually are:
- Intake and process orchestration
- Spend analytics
- SRM
- Third party risk management
- Contract management
- ESG related metrics e.g. carbon accounting or supplier sustainability audits
The biggest enterprise level platforms may offer slimmed down, basic modules for some of these. However, the platforms aimed at mid-market definitely won’t have these features.
Either way, going best-of-breed for these requirements will offer you more functionality and usually a better UX. Even if some of the suites have modules with these features, they won’t be as feature-rich as a point solution.
We actually cover 20 different primary categories of procurement tech in our software finder app, but those listed above are the core ones.
And then there’s the niche category specific software
Whether it’s something specific to the nuances of direct spend, or a certain niche within the indirect category. You’ve got specific digital procurement tools offering point solutions for categories of spend as wide-ranging as:
- Agricultural commodities
- Metals
- SaaS procurement
- Lab supplies
- Freight sourcing
- MRO and spare parts
- Capital projects
- Telecoms and IT infrastructure
- Print and promotional items
- Consultancy and professional services
One of the suites can’t possibly hope to cover all of the nuances considered when buying any of these very specific products or services. They are not designed to do this.
Does your organisation spend a disproportionate amount on any specific category of spend?
Then it’s probably worth exploring whether there’s a category specific tool which could better manage this area of spend than a standard source-to-pay suite.
There’s rarely a standard one-size-fits-all answer to the question of which platform is best for your business.
That’s why we offer our RFI-as-a-Service package to tailor something towards your unique specific requirements of what you need your digital procurement tools to do.
To find out more, and to help us understand your requirements, why not schedule a free 30 minute intro call with us.
Let’s see if we can help you cut through all the noise and quickly find the right solution for you.
