So you're looking for ways to reduce the company's expenditures. You take a quick look at the various channels through which your corporate dollars flow, and you start to realize this is no small task.

How do you calculate the total effect of your spending decisions? How does your company select the vendors it buys from? What defines an economically healthy partnership? Could you do better with another vendor? How many hours do you spend honing your requirements and researching potential partners? How do you weed out the gems from the junk?

Frictionless Commerce of Cambridge, Massachusetts, touts the benefits of "strategic" sourcing, which it defines as "optimizing the selection and management of suppliers for the supply chain and general operations." According to Frictionless, the routes companies usually take for help with strategic sourcing are consulting, hosted point solutions, and software. For larger companies that go through the strategic sourcing process continually, says Frictionless, software is the best way to go. Frictionless Sourcing is a software suite that automates the process from expenditure analysis to supplier selection and vendor management.

ADVISOR spoke with Eric Levin of Frictionless about sourcing practices, including how it differs from procurement, why it's so important, and why companies have been reluctant to automate their sourcing processes.

ADVISOR: "Sourcing" seems to be one of those terms that gets thrown around a lot, but the total ramifications of it are hard to conjure up. Tell me how you define sourcing, and especially how you differentiate it from procurement processes.

LEVIN: Sourcing is very similar to the word "brand." If you ask anybody to name a brand, it's no problem. But if you ask them to describe what a brand is, they start stammering.

Sourcing is the same way. Everyone understands sourcing: You've got to figure out what to buy, and from whom. Pretty straightforward. The real difference here is the difference between sourcing -- if you look it up in a encyclopedia, it would say basically "to buy something from somebody" -- and strategic sourcing. Strategic sourcing is the difference between just buying something when you need it, and really taking a hard, methodological, objective approach to try to understand who the right vendor is for your company, and to put a more long-term, large-frame environment around choosing your vendors and maximizing the work you do with your vendors. ...

It's very different from procurement. Procurement is a very tactical thing that you do to buy something -- typically off of a catalog. When you talk about procurement, you talk about the steps people often call "req to check." You approve a requisition, you decide who you're going to buy it from, you receive quotes, develop a PL, place the order, confirm the order, follow up with payment, and then report on that.

Sourcing is a very different process. It has to do with mobilizing a team, collecting a bunch of data, analyzing that data, developing a strategy for sourcing, initiating that strategy, negotiating, creating a final agreement, and then managing that supplier relationship. It's very much a cyclic process, so the people that do this for a living are constantly doing it over and over again on the same categories to be sure that they're always maximizing who they're buying from. [Sourcing] is before e-procurement or ERP systems take over.

I'll give you a real-world example of that. We were at a conference about two months ago. We were having lunch with the senior vice president of a large foods company. We started talking about technology, and he said, "Well, we use SAP for our ERP implementation, and we just chose Ariba for our e-procurement vendor." We asked him how that was going, and he said, "Well, you know how these things go. It has it's ups and downs. But generally, it's OK."

We asked him what the problem was, and he said, "Believe it or not, the thing that's killing us is ... An Ariba system -- an e-procurement system -- is basically an online catalog. In order to get going, you've got to figure out which vendors you want to populate in that catalog in the first place. Who are my preferred vendors? In doing that, we found out that we're buying staplers from more than a thousand different vendors."

We were sitting there next to another company that claims to be in the supplier-enablement space, and they got all excited. They said, "That's great! We'll help you hook up to a thousand vendors!"

The guy looked at them with utter disdain and said, "Why would I want to do that? Are you insane? I want to figure out -- of that thousand -- which three should I put in my e-procurement system."

That points to the problem they have in sourcing. Even to get from a thousand suppliers to figure out which are the right three to go with long-term -- that's sourcing. ...

ADVISOR: Isn't there a lot of shared philosophy between procurement and sourcing?

LEVIN: They tend to happen, even come about, in very different ways. With sourcing, one of two things happens: You have to buy something that's really big, very unusual, or very high in value, or you have a methodological approach to figure out how to save the company money.

Generally, what you have is sourcing people at companies. They're charged at the beginning of the year with, say, a goal of saving the company 6 percent this year. They'll start looking through the company's spend in a systemized way, and try to figure out which areas they can attack to find ways to buy the things in that area more cheaply, and more effectively.

So for example, they might start looking through and say, "Alright, it looks like we're spending a lot on computer equipment." They might analyze it a little further and say, "It looks like we're buying a lot of laptops." And then analyze a little further and say, "It looks like we're buying laptops from 12 different people. What if I could do a deal with one supplier and aggregate all that spend, and buy all of our laptops from that one person. Could we get better service, better warranties, and a better price? Let me go out and start negotiating for that contract."

ADVISOR: And a procurement person doesn't examine these problems in the same way?

LEVIN: Every company varies in the way they do it. But very often, the sourcing people are called either "contract managers" or "category managers," and the people in procurement are called "buyers."

[Buyers] get requests. Let's say you've already established a vendor for laptops, and it's Dell. Every time someone wants to buy something from Dell, they put in a requisition through their e-procurement system or through paper-based requisition if they don't have an e-procurement system -- and let's face it: 80 percent of the Fortune 1000 still don't. ... [Buyers] end up doing a lot of pushing paper around to move that requisition through the organization and make sure the order gets to Dell. ...

Once you've chosen a vendor, how do you actually transact with that vendor? That's procurement. Choosing the vendor in the first place is sourcing.

If you look at the way companies buy things, there's sort of three major purchasing processes that happen. One is e-procurement. E-procurement tends to be catalog-based requisitioning. The second piece for companies is collaborative design purchasing. There's an engineer with one company collaborating directly with an engineer with another company to make a specific input to a product; once you're done collaborating, you go ahead and buy that. The third major process for purchasing is sourcing.

Each of these processes tends to be done by different people in different departments. In fact, most Fortune 1000-size organizations have a separate sourcing department and a procurement department. Often, you'll have an executive vice president of sourcing who is a peer to the executive vice president of purchasing.

Read part 2 of this interview.