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.