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E-procurement: From Brilliant Innovation to Common Cliché

Written By: D. Geller
Published On: April 7 2000

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Introduction

In 1998 researchers at the Haas School of Business of the University of California at Berkeley published an important study called "Procurement in the Internet Age - Current Practices and Emerging Trends." Essentially a survey of 80 technology-oriented companies, the paper proved to be a good guide to subsequent developments in E-procurement. It is a measure of how far we have come in less than two years that in their summary of "interesting findings" the very first one listed is:

  • The attitude towards the Internet is overall positive

This was interesting at the beginning of 1998. It would not have been impossible that a majority of purchasing organizations were highly skeptical of the Internet. After all, purchasing agents depend heavily on personal interaction with suppliers. Furthermore, the Internet was far from omnipresent: many of the companies surveyed had no Internet access, or had only a single connection, and so were unable to complete the survey except by paper and pencil. But despite these and other potential roadblocks there was a strong realization that E-procurement had the potential to reduce costs and time, the two most important measures of success in procurement of goods and services. (Customer satisfaction was third and quality of goods was fourth).

So it is hardly surprising that, just two years later, E-procurement is taken for granted in almost every industry and sector, and that business-to-business E-commerce has overtaken consumer commerce as the focus of attention, especially on the part of the stock market and venture capitalists.

What does E-procurement look like today? Roughly speaking there are seven kinds of players, of which four are software and service vendors and three are marketplace operators. The four vendor groups include:

Enterprise Procurement: These are the vendors whose early successes and high market capitalization created E-procurement. They specialize in E-procurement and their products carry large price tags. Players in this segment include Ariba and Commerce One.

ERP Vendors: ERP vendors have been suffering from their own success. Having conquered the corporate IT world, they have been struggling to show the impressive growth curves of their heyday. As they watched the enterprise procurement vendors sell to their own biggest customers they saw a natural fit and a new niche into which they could expand. Players in this segment include Oracle, PeopleSoft, Oracle, and Baan.

Corporate Portal: These are companies that already have other products but have seen the potentials of E-procurement and have launched products in this space. They are building from their existing strength, and repackaging their existing products with procurement to offer integrated product suites with common user interfaces, common backend systems, and common administrative tools. Players in this segment include Peregrine, Concur, Remedy, and Intelisys.

Application Service Providers: The ASP market in E-procurement is developing at a time when Internet technologies make outsourcing convenient for both client and provider. Players in this segment include almost all of the above. Most of the companies that offer corporate licenses are also looking for ASP arrangements. Some are becoming their own ASP's, some are licensing their software to ASP's or even to ISP's who then resell the license to their own ASP customers, and some are doing both.

As Figure 1 suggests, larger corporations tend to be sought after by the ERP and Enterprise Procurement vendors, while midrange and smaller companies are targets for the corporate portal vendors and the ASP's.

There are other companies that don't fit any of these molds. For example, Clarus Corporation recently unloaded its portfolio of applications (ERP, financials, and human resources), thereby forgoing the strategy of other Corporate Portal types, to create a new E-procurement business from scratch.

The types of marketplaces include:

Singletons: These are companies that create their own marketplaces, which they host themselves. Companies like Staples and Dell fall in this class.

Verticals: Vertical marketplaces concentrate on a specific industry or type of product. Examples include: CHEMDEX.com in the life sciences, E-hospitality.com in the hotel industry, GM TradeXchange in the automotive industry, and buzzsaw.com in construction.

Aggregators: These marketplaces bring together a number of suppliers. The marketplace will provide catalog creation and hosting for the suppliers and some form of unified searching for the buyers. Examples include Concur Commerce Network, the Ariba Network, and Commerce One's Global Trading Web.

At this point in the evolution of the market, software vendors are creating their own marketplaces, although some also sell marketplace-creating tools to others. The larger aggregators may have a number of marketplaces - a combination of verticals and regional markets - that are tied together as a network.

One significant indicator of the direction of the marketplace market is Commerce One's strong push to create a truly global marketplace. Commerce One is partnering with significant corporations in many regions to create regional marketplaces that will also serve as portals to a global marketplace consisting of the collection of all of them.

Another indication is the recent announcement of Concur's Business Advantage, a program offering leveraged buying advantages to small and mid-sized companies. What is especially novel about this is Concur's teaming with insurance and investment giant SAFECO, which will likely result in Concur's products and services being sold - or at least promoted -- by SAFECO's independent agents.

A company looking to bring this technology in-house has to predict not just which vendors will be able to do the job - meeting both immediate and future needs - but which new business models will spin off from emerging technologies.

The growth of business-to-business electronic auctions, for example, is not an evolutionary step from pervasive non-digital auctions, although such were of course not unknown. Rather, it comes from the availability of technology to support such auctions cheaply, meeting a need that was not high on very many lists because there was no expectation that the need could be met. What other needs might be someplace down on the wish list just waiting for the right technology to propel them into the "must have now!" column?

Trend

Independent vertical marketplaces will sprout like mushrooms, but some will dry up and others will become part of higher-order colonies.

Trend Overview: It is clear that vertical marketplaces are a hot item. As they come down the runway, one after another, each is greeted with delight, at least from its own particular industry. The star of the show has been Chemdex, a company that recently renamed itself to Ventro and redefined itself from a builder of vertical markets to an incubator for vertical markets. Vertical markets will proliferate because the more general MRO marketplaces cannot afford to build strength in specialty industries, and will find it easier to offer connections to existing verticals.

Trend Impact: Some of the larger E-procurement companies, such as Ariba, Commerce One, Oracle and SAP are involved in building verticals in high profile areas such as the energy and automotive sectors, but industry specialists will build most verticals. This does not leave the major vendors out of the picture: they will provide the platforms for building the vertical marketplaces that are managed by others.

In the longer run, apparently independent verticals will merge to take advantage of common buyers or suppliers or simply economies of scale. This will be driven by those large industries that first become heavy users of a number of verticals, because of the inefficiencies of working with large numbers of marketplaces.

Trend

Standards will accelerate the drive toward market commoditization; market commoditization will accelerate the drive toward standards

Trend Overview: There's no better indicator of this than a recent announcement that General Motors, Ford and Daimler Chrysler will cooperate to create a single marketplace for the automotive industry. This announcement came only a few months after Ford signed with Oracle and GM signed with Commerce One for independent marketplaces. Many commentators were surprised that Daimler Chrysler did not have its own announcement at that time; some looked to Ariba to make its mark in that arena, while others noted SAP executives becoming frequent fliers to Detroit's Metro Airport.

Announcements of the new global marketplace stressed the difficulty that separate marketplaces would have for suppliers doing business with more than one automaker, but there were two subtexts, both involving standards.

First, it is not at all clear why a supplier working in two or more marketplaces should have any integration trouble at all. Both Oracle and Commerce One stress open standards and XML, which means that entering a second marketplace should be almost trivial for a supplier.

Second, the absence of both Ariba and SAP from this partnership may be news in itself. While the big three automakers might reasonably have decided that two vendors were enough, both Ariba and SAP stand a bit further from standardization than the others. Ariba's proprietary dialect of XML is not blessed by any of the major standards initiatives; while it is theoretically true than XML makes it easy to translate between dialects, the practice is still complex. SAP's E-procurement solutions play only with SAP's own ERP systems, and in fact require a complicated and costly upgrade to version 4. We think it likely that interoperability and standards had a role in the way this giant trading exchange got shaped.

At press time there were rumors circulating that Chrysler-Daimler may be going after its own vendor after all, probably SAP, and that the degree to which this marketplace will be unified will not meet early expectations. This would be a minor setback to the cause of interoperability. It may represent a concern about sharing corporate data or an objective look at the realities of standardization today. However, so long as the marketplace and suppliers can interoperate with each company the basic nature of the venture will not change.

Trend Impact: One lesson is that standards work has to accelerate, and that a viable standard or collection of standards must evolve soon for E-procurement to reach its potential.

Another is that with standards, there is little benefit to having multiple competing marketplaces. If the technical work of entering marketplaces was nearly nil after the first, then both buyers and suppliers would have easy entry and exit. And, as Adam Smith taught, that leads to increased efficiencies and to low margins. In some cases, as with the automotive industry, the best move will be for independent marketplaces to merge. In others the result will more likely be that marketplaces will compete aggressively on transaction fees and amenities. We think that the technical sophistication of the suppliers in an industry will drive the direction that the industry's verticals take.

A year from now we think it will be very clear that key players in E-procurement will have to have open, public XML access. Ideally a standard would develop as a large vocabulary of tag and schemas that apply across industries, with each industry able to produce its own specialized dialects. This is one of the goals that Microsoft was shooting for in its BizTalk initiative, with the exception that Microsoft was looking for market forces to develop standards based on use.

We think that things will move in the general direction we've outlined, but that it will take closer to three years for something approaching a cross-industry standard to be both defined and generally accepted. And, even then we believe that there will be somewhat less progress at the level of individual industries.

We expect that within three months Ariba will start giving out signals that they are moving away from their proprietary dialect toward a more widely accepted standard. This may come in the nature of increased support for one of the evolving standards that is accepted by their competition, or as the kind of marketing statement that says "we've always been interoperable, but now we'll be even more so." Similarly, SAP will tell us that integration with other ERP vendors was always in their plans, although it will probably be effected through third party tools and integrators rather than as a core feature of the SAP product.

Trend

Midrange companies will vote their E-procurement dollars for corporate portals, but the candidates will undergo many transformations

Trend Overview: Companies need a wide variety of internet-enabled desktop applications to reduce (labor) costs. E-procurement is the one application that also reduces spending on items that can be 30 percent or more of the average company's budget, so it is likely to be a significant decision driver. But the current offerings from a variety of companies show that other applications fit neatly with E-procurement.

The same kinds of workflow rules that drive E-procurement are also useful with some other applications. The same items that are acquired with it can then be tracked and managed with yet a different set of applications. Few companies would want to deal with multiple vendors for a related set of desktop applications, given the difficulties of integration and of user training when they can deal with one.

The question is which one? Initially sales are being driven to a significant extent by a vendor's strengths outside of E-procurement.

A company to which purchasing and depreciating capital assets is a major cost control item will look to a vendor like Peregrine, which has pre-existing strength in that area. A different company may have as its only assets the laptops it provides to its frequently traveling staff. Such a company may treat the laptops as expendables, realizing that they need to be routinely replaced every few years, and will look to a vendor like Concur which brings strength in travel and expense management. In the long run, most of these vendors will have to offer most of these capabilities, either in their own product line or through tightly woven partnerships with specialists.

Once the basic capabilities are fairly well pervasive, competition will extend to other dimensions, perhaps inclusion of specific vertical market features or perhaps a new class of application that hasn't yet hit the scene.

Trend Impact: Concur and Peregrine look like leaders in this space and will for six to nine months be the models that others will follow. But there is plenty of room for the general direction to be changed by an upstart. Lawson, for example, has tied a form of E-procurement to an E-commerce enabling suite. Suppose they were to beef up their E-procurement capabilities, and purchase a developing corporate portal company with some other functional offerings. The combination of corporate portal with relatively easy entre into E-commerce could be an irresistible offering.

Trend

There won't be room for many aggregate markets, and they may all belong to financial services companies.

Trend Overview: As with vertical markets, there is no long-term logic that supports a profusion of aggregate markets. It's hardly clear why there should be more than one, but we know that entrepreneurial ingenuity will provide reasons. One such reason is being offered by Concur, whose Concur Business Advantage ties together a family of premier providers who, we expect, will begin to offer various kinds of synergistic deals to buyers to keep them on this network. Other aggregators will develop other kinds of bells and whistles, but in a world where the point is to leverage volume buying, and in which there are already almost half-a-dozen ongoing and nascent aggregator marketplaces, consolidation will be the most potent force.

Trend Impact: To suggest that credit card companies will own all of the markets is probably extreme, but participation in or ownership provides incredible leverage opportunities for a Visa or a MasterCard. As Concur's partnership with SAFECO shows, a financial institution brings a great deal to a marketplace -financing, sales channels, and investment products that can be sold through the market. Involvement of a credit card company would also provide a pathway to inclusion of consumers - or at least of home-office type businesses.

Trend

Auctions will attempt to encompass barter, and then barter will involve multi-way trades. E-commerce will ultimately run up against the power of governments to coin money.

Trend Overview: We all know the textbook story of the evolution of money. First Og trades two sheep for three of Gog's goats. But the next time Gog wants sheep, Og doesn't need any more goats. However, Og does need lumber. Gog alas doesn't have lumber, but Zog, who just happens to have surplus lumber, has some very dull stone axes, which, as luck would have it, Gog is an expert at sharpening. So Gog sharpens the axes for Zog, Zog gives the lumber to Og, and Og gives the sheep to Gog. Eventually, carrying goats and trees around gets too hard, and everyone gets together in a World Trade Organization to invent money.

Auctions are clearly big things in the consumer market and are on their way to becoming a major feature of E-commerce. Barter between companies can be difficult since one seldom ever has what the other wishes. But with sufficient trust it is easy to see a form of barter developing in which a digital marketplace manages credits. No money changes hands, which may have interesting implications for taxation. Governments might have the opportunity to squelch this development early on, but given the sanctity of the American ban on Internet taxation, the right entrepreneur and strategy could get this going well before the governments figure out what's happening, let along how to work together to tax it.

Trend Impact: This is certainly speculative and doesn't have much immediate impact on selections. However, any business that can imagine barter being a useful part of their interactions with other companies might do well to watch as barter begins to be featured in digital marketplaces.

Trend

This note, as well as anything else you read today, is already obsolete.

Trend Overview: The very recent partnership between IBM, Ariba, and i2 was pretty much a surprise to everyone. Two days before, General Electric announced a major retargeting of its Information Services business to emphasize E-commerce. Other major announcements that preceded it by at most a few weeks were Concur's launch of its own aggregate network, Commerce One's new release, and the unfolding details of the two, one, or three huge marketplaces in the automotive industry, on which the final repost has still not been written. Within days of the IBM announcement i2 purchased Aspect Development and SupplyBase in the largest software purchase ever.

Trend Impact: Of course this trend is good news for consultants and research sites (disclaimer: like this one). But we think it is good for the customer as well, While in the short run - the next nine months or so - there will be a certain degree of angst for anyone planning an E-procurement solution, this should settle down to a richer collection of integrated offerings.

It is worth noting that the potential savings from an early implementation of a solution that fits your needs is probably worth more than waiting for a to-be-announced solution to materialize, so long as the company you choose has the vision and resources to keep up its development efforts.

We think that the movement of such large forces as IBM and GE will kick off more possibilities for other companies to offer solutions for the midmarket. While the big companies will certainly compete for the upper end, different companies will come in to serve the lower end and the small business market.

Conclusions

In conclusion we have a wild and wooly market place that still has frontiers to push on even as it begins to settle down. With two to three aggregate marketplaces and typically one to two in each of the vertical spaces, users will be assured of access to lowest prices. Competition will be most interesting at the desktop as procurement blends with the corporate portal business.

For users, the key to a successful selection is to build your short list from those vendors who can meet your absolutely critical requirements. Evaluate that short list based on the future. Look for those vendors who have a strong strategic vision and the resources to carry it out. If necessary, we think it would be prudent to be willing to yield on some of those current requirements to find a vendor that will bring you smoothly into the future.

 

 
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