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The Wheres of Electronic Procurement

Written By: D. Geller
Published On: September 6 2000

Stating The Problem

Electronic procurement is one of the major business-to-business growth markets on the Internet. As opposed to previous generations of procurement, which have of course been "electronic" for many years, E-procurement refers specifically to procurement that is based, at least in part, on the use of internet or intranet technology. The final direction will eventually involve all parties - users, approvers, suppliers - working from standard browsers, but not all vendors have moved away from products that require specialized desktop software.

The whys of electronic procurement are obvious. Organizations look to E-procurement to reduce administrative costs and improve turnaround, and to help them exercise control over inventory and spending. E-procurement systems also provide new sources of supply and can lead to lower prices for the good being procured. It is no surprise that, according to a survey conducted by Purchasing magazine, 90% of purchasing professionals expect to be buying online by the year 2002. The market for E-procurement tools is estimated to grow from under $200 million in 1998 to $8.5 billion by 2003.

But the wheres of electronic procurement may not be quite so obvious, because E-procurement needs to be thought about in a way that is different from most other applications. For most applications, while there may be inputs coming from outside the company or data sent to the outside, the core of the application - the way we think of where it is -- lies well within the enterprise. With E-procurement the focus is on the transaction, which lies between two different organizations.

If E-procurement were simply about two different players - a buyer and a seller - it would not be quite so interesting, or so difficult. But each player is really the center of a star: the buyer deals with many sellers, and the seller deals with many buyers; see Figure 1. So the question of where E-procurement happens is neither trivial nor obvious.

Different Solutions

An E-procurement system can be located at the seller, at the buyer, or in between. Figure 2 shows the first case. In this sell-side model the buyer is like a shopper on Main Street, who visits the various vendors of interest to look at the offerings and prices. The seller mounts software that enables each buyer to browse and purchase. This is, clearly, a sell-side model.

The obverse case is, obviously, the one shown in Figure 3. Here the sellers have to bring their wares to the buyers, like Travelling Salesmen of the early 20th century. This is a buy-side model.

In the final case, in Figure 4, third parties set up department stores to connect buyers and sellers. This is called the Marketplace model; it has also been called the portal model - or, when it serves a vertical market, the vortal model.

Trade-offs

Each model has advantages and disadvantages for the buyer (and, of course, for the seller). The important questions revolve around who builds and maintains the catalogs that show what products are available, how well the procurement functions integrate with corporate procedures and back-end systems, and how convenient the result is for the buyer's employees.

In the Main Street model each vendor puts up its own catalog, possibly on an extranet. A company in partnership with such a vendor can have its employees navigate to the vendor site with their desktop browsers and make purchases. No catalog maintenance needs to be performed by the purchasing company, which makes adoption of such a system cheap and easy. However, integration with back-end financial systems will not be easy. There are standards being developed, mostly XML-based next-generations of EDI, which in theory will make it easy for any of the documents resulting from a purchase to be read by legacy or ERP systems. The success of that approach remains to be seen as the various proposed standards compete for acceptance. Some of the major vendors such as Ariba and Commerce One have their own standards, as does Microsoft. The Main Street model also suffers from the problems of comparison-shopping and control. In order to comparison shop a purchasing agent must navigate through a number of vendor websites, each with its own interface, packaging and shipping arrangements and discounts. Controlling maverick purchases is nearly impossible. The Main Street approach will work best for smaller purchasing organizations, and for cases where the vendor product is fairly specialized. One example of this model is a new initiative by Eastman Chemical company. Eastman is providing low cost computers from Dell and internet access via UUNET to allow its customers to make purchases at the Eastman site.

The other end of the scale is the Travelling Salesman model. Here the vendors come to the purchaser by providing data from which the purchasing company builds and maintains its own catalog. There are many advantages for the company doing the purchasing. Since it controls the catalog it can exercise tight control over which products get into the catalog, and even give different employees different product selections and quantity limits. In this way purchasing can be brought to the individual desktop, and employees have a single interface to deal with. On the other hand, building and updating catalogs can be a major editorial effort. One vendor in this market, PurchasePro, installs its software at buyer sites. Using the PurchasePro software the client can shop at both vendor sites and at marketplaces. One of PurchasePro's customers is the hotel operating chain Meristar.

In the middle are the Marketplaces, third party sites that bring buyers and sellers together into their own market space. Marketplace sites do provide the unity of a single catalog, but are less integrated with backend systems and the buying company's own policies. Naturally, many vendors in this space are putting significant effort into making their solutions look as much as possible like buy-side solutions.

There are actually two variants of Marketplace. One is the vortal, the vertical marketplace. One example is ChemConnect, which brings buyers and sellers in the chemicals industry together. One estimate projects that 15 percent of this $1.6 trillion industry will be Internet mediated within the next three to five years.

The other variant is a marketplace that covers a wide variety of product types. The real driver here is MRO - Maintenance, Repair and Operating supplies - procurement, which can be as much as 35% of a business' total expenditures. Additionally, MRO buying is a frequent cause of maverick buying - buying off of the preferred vendor list. There are estimates that up to 40 percent of MRO buying is maverick buying, and could be costing a typical billion-dollar company as much as $10 million per year in lost vendor discounts. There are a number of players in this space. The leaders are Ariba and Commerce One, both of whom are actively soliciting vendors and selling their solutions to buying organizations. Others include Concur Technologies, Intelsys, and many smaller players. There is also competition in this space from large ERP vendors like SAP and Baan, Oracle, IBM, HP, and others.

One way to implement a Marketplace model is to be completely Internet based, particularly on the buyer side. This would mean that no software resided on the buyer's own computers and that all operations were done by means of browsers. A second approach would put specialized software on the desktops of the purchasing company's employees, but house network of vendors centrally on the Internet.

Figure 5 is a suggestive comparison of the three approaches. It shows graphically how the different models compare in convenience for some important criteria. But, as always, the devil is in the details, which change daily in this product space. For example, integration into back-end systems is theoretically expected to be harder with the Marketplace model than for the Main Street because the Main Street solution is installed and customized on the buyer's site. But there is no reason that a particular vendor couldn't make a sufficient investment so that their Marketplace model would integrate easily with your back-end systems. Indeed some such ability is promised by major Marketplace vendors.

Conclusion

E-procurement is the most critical short-term application area for organizations now that Y2K efforts are winding down because the potential savings are so tremendous. Using E-procurement for ordering MRO goods can lead to savings from five to twenty percent. The same study reported that the cost of processing orders can drop by 70%.

We believe that due to the cost of catalog maintenance pure buy-side solutions, where the buying organization builds its own catalogs, will be a rarity in the short-term, accounting for no more than 15% of the total purchasing market, and only a few percent of MRO purchasing. it won't make sense for most companies. However, once there is more standardization on the form of XML used for vendor catalogs, this could resurface as a viable option, perhaps in three to five years. We believe that most buying organizations will gravitate toward a Marketplace model, at least in the sense of using centralized networks of sellers with centralized catalogs. The vendors of these products are busy building up both their vendor networks and their technology to make this an attractive option. We believe that more than half of users will do their purchasing through browsers, but that specialized purchasing software installations will sit on at least 30 percent of desktops. . Vendors themselves are keeping both options open (See TEC NEws Analysis article: "Ariba Reaches Out to the Little Guy" September 28th, 1999). Potential users should do careful analysis of features and, especially, the degree of integration they need with their back end systems.

 
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