[From iSource Business, February/March 2003] The last time iSource Business covered strategic e-sourcing in this ongoing supply and demand chain article series (October 2001), the statement was made that, "although most enablers claim to offer strategic e-sourcing, current e-sourcing tools on the market can technologically organize and expedite only a few or some of the strategic sourcing processes and the procedural elements they entail."
Today, 14 months later, not much has changed.
Until the hype generated during the overblown Internet bubble died down, along with the excitement of the reverse auction, software providers were hard pressed to create broad functionality in their offerings with strategic e-sourcing. However, the next few months should mark a change in this trend.
In AMR Research's latest report on e-sourcing, released in the latter half of 2002, the firm reported that e-sourcing software providers were "long on vision, but shorter on functional completeness with no vendor reaching functional maturity for at least 18 months." Additionally, the study reported that "vendor flux has led most users to self-funded pilots, but this tactical approach often doesn't lay the best foundation for true strategic sourcing."
Says Pierre Mitchell, senior analyst with AMR Research: "The market is littered with specialists with no one vendor having critical mass and leadership in both technology and domain expertise. It's been a very hot area, but somewhat of a cautious area. You might call it the land of the pilot for the last 18 to 24 months. Before, providers were dabbling with different pieces [of sourcing] such as spending analysis, RFX or auctions. It becomes a real application market once all the required elements of strategic souring are built into a system."
Mitchell adds that a lot of the future growth in the sourcing market will be driven by the enterprise resource planning (ERP) players in the next year or two when they dive into this area with expanded functionality.
Every analyst that iSource Business spoke to adheres to some of the same points. David Metcalfe, a senior analyst with Forrester Research, says, "The majority of firms already using sourcing tools will expect to be able to expand out of auctions and into RFQs [requests for quotes] and less price-based events."
Jon Derome, senior analyst for The Yankee Group in the areas of procurement and integration technology, suggests that much of the problem has come from the technology itself. "Integration costs and the application logic were big issues in this new application market. But now that the providers are beginning to show signs of greater integration capabilities, better pricing and the maturing of the application logic, enterprises can expect more from strategic sourcing applications."
But overall, the AMR Research report "e-Sourcing: ROI Tastes Great, Applications Less Filling" describes a market that lacks a discernable leader, sourcing applications that are simplistic in the midst of a very complex business process, and RFX and bidding event functionality that is similar between products.
Some exciting findings within the AMR Research study shows that organizations using sourcing applications on average save 10 to 15 percent on direct goods and 20 to 25 percent in indirect goods and services while also slashing sourcing cycle times. In addition, some sourcing software providers are taking the lead in performance management and direct materials support capabilities.
Growth in the Forecast
According to AMR Research, the sourcing software and services market was approximately $1.6 billion in 2002 and will reach $1.9 billion by the end of 2003, representing a compound annual growth rate (CAGR) of 28 percent.
"This is a healthy growth rate for e-sourcing compared to the overall supply chain market, which will be 19 percent," says AMR's Mitchell. "And, again, the ERP players will be driving a lot of this growth."
Though The Yankee Group does not have a specific number, it also indicates that 2003 will be the year for renewed growth in the e-sourcing space. "You'll see a shift from service to more software product dollars in the market," says senior analyst Derome.
Boston-based Aberdeen Group has actually revised its growth estimates in the strategic sourcing market. In its report, "Making e-Sourcing Strategic," the research firm says it believes e-sourcing will outpace most other enterprise business application providers.
"Specifically, revenues for independent software vendors [ISVs] providing e-sourcing technologies and services will grow from $820 million in 2001 to over $3.1 billion in 2005, representing a CAGR of 39.8 percent," the study states.
"This should be no surprise to anyone," says Tim Minahan, senior research analyst with Aberdeen. "Huge opportunity continues to exist in this market. By our estimates, U.S. businesses channeled $270 billion of their spending through e-sourcing solutions in 2002. By 2005 the figure should be $738 billion."
The potential for the e-sourcing providers in the coming year looks exciting, but challenges still lay ahead. As this software market's potential has emerged over the last few years, software and services providers rushed in, but none with a complete footprint to support the cross-commodity requirements of large, diversified and complex corporations, suggests AMR Research.
Notching Up the Competition
While the road to a more robust functionality is not paved with the smoothest of surfaces, the providers in this space appear poised to do some exciting things in 2003. Already, for example, FreeMarkets, with its release of ES late last year, aims to improve its overall capabilities. And, if one examines the ERP players trying to service this space, you'd hear the analyst community describe PeopleSoft as having the "best showing" so far.
But in terms of functionality, here's the word on the street: Aberdeen's in depth research has revealed that the early adopters of strategic e-sourcing are getting more serious about their needs today. While quick cost reduction hits were the major newsmakers in 2000 and 2001, dedicated users now want supplier performance measurements (see the joint Aberdeen/iSource study on this topic at iSourceonline.com), sourcing collaboration, contract management, and process- and commodity-specific RFX templates to be a natural part of the functionality of their e-sourcing application. In addition, many users want to integrate e-sourcing with order execution platforms.
Says Aberdeen's Minahan: "Some enterprises view e-sourcing as the foundation of a larger total cost management (TCM) strategy."
Minahan adds that the process functionality of future systems really needs to be based around strong negotiation capabilities, collaboration, document management, project management, knowledge management and analytics. "Until providers can build out around these key requirements, it will be hard to prove the overall value of a system to today's customer," he says.
Some are beginning to have this capability through what Aberdeen calls a "hybrid" e-sourcing model. This type of model combines a self-service application with outsourced category expertise, methodologies and sourcing-event management services that can be accessed when needed.
AMR Research also reminds us that, given the early state of the e-sourcing market in a down economy, most users limited the e-sourcing to RFX, bidding events and bidding analysis an environment and reaction to the technology that should not be a surprise to anyone.
Says AMR's Mitchell: "There's been a natural evolution of the functionality of the providers given the state of this software market."
Within a large number of future requirements in functionality, AMR Research lists bill of material (BOM)-based sourcing, category management, commodity team collaboration, cost savings tracking, internal performance management, process management, program management, specification management, supplier discovery and qualification, supplier outreach and training, and supplier performance management as some of the top requirements for e-sourcing application functionality.
In many respects, the sky is the limit with regard to what this future technology will do for enterprises. And with the sophisticated expectations of today's customer, providers have their work cut out for them.
Testing the Waters
The e-sourcing market may be populated with dozens of providers, but each one often has a very different functional footprint and value proposition for its potential clients. The trick for practitioners is to commit to some thorough research of the market to find a provider that matches their needs.
AMR Research suggests that, "from a functional and corporate perspective, no discernable leader exists." However, their market research does give some indicators as to who is doing what in the market.
While FreeMarkets and A.T. Kearney Procurement Solutions have "a clear edge" in domain expertise, AMR says they are still working on their broad functionality footprint. On the other end of the spectrum, vendors like Emptoris, Frictionless Commerce and Verticalnet have strong functionality but lack broader services expertise, requiring a corporation to either go it alone or contract with a services firm to help with the implementation.
The analyst firm also considers i2 and Manugistics to be well able to support component supplier management, but also encouraged them to build out more functionality in e-sourcing in general. Finally, there's an expectation that Agile and MatrixOne will focus on the component supplier management feature of their software in the next 18 to 30 months and build up other areas of functionality, such as supplier and sourcing performance management.
As stated earlier, users want to see a greater connectivity between order management, product lifecycle management and sourcing. Many providers, such as i2, Manugistics, Agile, Tradec, Polydyne, RiverOne and Promeria, have tailored their products to accommodate this strategy.
Other analysts recognize that Mindflow, Diligent, B2eMarkets, Perfect, MatrixOne, Moai Technologies, Procuri and PruchasePro's strength continues to reside in the RFX bidding events and bidding analysis. Mindflow, Diligent and Procuri also have strong footprints in specific vertical markets, realizing great partnering opportunities with providers whose strength is in strategic sourcing domain knowledge.
When you examine the ERP market, you see variety. As stated earlier, AMR Research recognizes PeopleSoft as having the "best showing." Oracle and SAP continue to develop their own native applications. Commerce One and Ariba are gathering significant recognition in this area, though they continue to be better known for their procurement capabilities. Ariba's large, installed base and product strategy helps it take a strong position in sourcing.
In the end, AMR Research believes that provider specialization and users' functional needs will divide the market into three categories: application providers that provide deep e-sourcing capabilities, professional service providers that provide broad change management services, and loose networks of sourcing services providers that provide customized software and service offerings.
Today, 14 months later, not much has changed.
Until the hype generated during the overblown Internet bubble died down, along with the excitement of the reverse auction, software providers were hard pressed to create broad functionality in their offerings with strategic e-sourcing. However, the next few months should mark a change in this trend.
In AMR Research's latest report on e-sourcing, released in the latter half of 2002, the firm reported that e-sourcing software providers were "long on vision, but shorter on functional completeness with no vendor reaching functional maturity for at least 18 months." Additionally, the study reported that "vendor flux has led most users to self-funded pilots, but this tactical approach often doesn't lay the best foundation for true strategic sourcing."
Says Pierre Mitchell, senior analyst with AMR Research: "The market is littered with specialists with no one vendor having critical mass and leadership in both technology and domain expertise. It's been a very hot area, but somewhat of a cautious area. You might call it the land of the pilot for the last 18 to 24 months. Before, providers were dabbling with different pieces [of sourcing] such as spending analysis, RFX or auctions. It becomes a real application market once all the required elements of strategic souring are built into a system."
Mitchell adds that a lot of the future growth in the sourcing market will be driven by the enterprise resource planning (ERP) players in the next year or two when they dive into this area with expanded functionality.
Every analyst that iSource Business spoke to adheres to some of the same points. David Metcalfe, a senior analyst with Forrester Research, says, "The majority of firms already using sourcing tools will expect to be able to expand out of auctions and into RFQs [requests for quotes] and less price-based events."
Jon Derome, senior analyst for The Yankee Group in the areas of procurement and integration technology, suggests that much of the problem has come from the technology itself. "Integration costs and the application logic were big issues in this new application market. But now that the providers are beginning to show signs of greater integration capabilities, better pricing and the maturing of the application logic, enterprises can expect more from strategic sourcing applications."
But overall, the AMR Research report "e-Sourcing: ROI Tastes Great, Applications Less Filling" describes a market that lacks a discernable leader, sourcing applications that are simplistic in the midst of a very complex business process, and RFX and bidding event functionality that is similar between products.
Some exciting findings within the AMR Research study shows that organizations using sourcing applications on average save 10 to 15 percent on direct goods and 20 to 25 percent in indirect goods and services while also slashing sourcing cycle times. In addition, some sourcing software providers are taking the lead in performance management and direct materials support capabilities.
Growth in the Forecast
According to AMR Research, the sourcing software and services market was approximately $1.6 billion in 2002 and will reach $1.9 billion by the end of 2003, representing a compound annual growth rate (CAGR) of 28 percent.
"This is a healthy growth rate for e-sourcing compared to the overall supply chain market, which will be 19 percent," says AMR's Mitchell. "And, again, the ERP players will be driving a lot of this growth."
Though The Yankee Group does not have a specific number, it also indicates that 2003 will be the year for renewed growth in the e-sourcing space. "You'll see a shift from service to more software product dollars in the market," says senior analyst Derome.
Boston-based Aberdeen Group has actually revised its growth estimates in the strategic sourcing market. In its report, "Making e-Sourcing Strategic," the research firm says it believes e-sourcing will outpace most other enterprise business application providers.
"Specifically, revenues for independent software vendors [ISVs] providing e-sourcing technologies and services will grow from $820 million in 2001 to over $3.1 billion in 2005, representing a CAGR of 39.8 percent," the study states.
"This should be no surprise to anyone," says Tim Minahan, senior research analyst with Aberdeen. "Huge opportunity continues to exist in this market. By our estimates, U.S. businesses channeled $270 billion of their spending through e-sourcing solutions in 2002. By 2005 the figure should be $738 billion."
The potential for the e-sourcing providers in the coming year looks exciting, but challenges still lay ahead. As this software market's potential has emerged over the last few years, software and services providers rushed in, but none with a complete footprint to support the cross-commodity requirements of large, diversified and complex corporations, suggests AMR Research.
Notching Up the Competition
While the road to a more robust functionality is not paved with the smoothest of surfaces, the providers in this space appear poised to do some exciting things in 2003. Already, for example, FreeMarkets, with its release of ES late last year, aims to improve its overall capabilities. And, if one examines the ERP players trying to service this space, you'd hear the analyst community describe PeopleSoft as having the "best showing" so far.
But in terms of functionality, here's the word on the street: Aberdeen's in depth research has revealed that the early adopters of strategic e-sourcing are getting more serious about their needs today. While quick cost reduction hits were the major newsmakers in 2000 and 2001, dedicated users now want supplier performance measurements (see the joint Aberdeen/iSource study on this topic at iSourceonline.com), sourcing collaboration, contract management, and process- and commodity-specific RFX templates to be a natural part of the functionality of their e-sourcing application. In addition, many users want to integrate e-sourcing with order execution platforms.
Says Aberdeen's Minahan: "Some enterprises view e-sourcing as the foundation of a larger total cost management (TCM) strategy."
Minahan adds that the process functionality of future systems really needs to be based around strong negotiation capabilities, collaboration, document management, project management, knowledge management and analytics. "Until providers can build out around these key requirements, it will be hard to prove the overall value of a system to today's customer," he says.
Some are beginning to have this capability through what Aberdeen calls a "hybrid" e-sourcing model. This type of model combines a self-service application with outsourced category expertise, methodologies and sourcing-event management services that can be accessed when needed.
AMR Research also reminds us that, given the early state of the e-sourcing market in a down economy, most users limited the e-sourcing to RFX, bidding events and bidding analysis an environment and reaction to the technology that should not be a surprise to anyone.
Says AMR's Mitchell: "There's been a natural evolution of the functionality of the providers given the state of this software market."
Within a large number of future requirements in functionality, AMR Research lists bill of material (BOM)-based sourcing, category management, commodity team collaboration, cost savings tracking, internal performance management, process management, program management, specification management, supplier discovery and qualification, supplier outreach and training, and supplier performance management as some of the top requirements for e-sourcing application functionality.
In many respects, the sky is the limit with regard to what this future technology will do for enterprises. And with the sophisticated expectations of today's customer, providers have their work cut out for them.
Testing the Waters
The e-sourcing market may be populated with dozens of providers, but each one often has a very different functional footprint and value proposition for its potential clients. The trick for practitioners is to commit to some thorough research of the market to find a provider that matches their needs.
AMR Research suggests that, "from a functional and corporate perspective, no discernable leader exists." However, their market research does give some indicators as to who is doing what in the market.
While FreeMarkets and A.T. Kearney Procurement Solutions have "a clear edge" in domain expertise, AMR says they are still working on their broad functionality footprint. On the other end of the spectrum, vendors like Emptoris, Frictionless Commerce and Verticalnet have strong functionality but lack broader services expertise, requiring a corporation to either go it alone or contract with a services firm to help with the implementation.
The analyst firm also considers i2 and Manugistics to be well able to support component supplier management, but also encouraged them to build out more functionality in e-sourcing in general. Finally, there's an expectation that Agile and MatrixOne will focus on the component supplier management feature of their software in the next 18 to 30 months and build up other areas of functionality, such as supplier and sourcing performance management.
As stated earlier, users want to see a greater connectivity between order management, product lifecycle management and sourcing. Many providers, such as i2, Manugistics, Agile, Tradec, Polydyne, RiverOne and Promeria, have tailored their products to accommodate this strategy.
Other analysts recognize that Mindflow, Diligent, B2eMarkets, Perfect, MatrixOne, Moai Technologies, Procuri and PruchasePro's strength continues to reside in the RFX bidding events and bidding analysis. Mindflow, Diligent and Procuri also have strong footprints in specific vertical markets, realizing great partnering opportunities with providers whose strength is in strategic sourcing domain knowledge.
When you examine the ERP market, you see variety. As stated earlier, AMR Research recognizes PeopleSoft as having the "best showing." Oracle and SAP continue to develop their own native applications. Commerce One and Ariba are gathering significant recognition in this area, though they continue to be better known for their procurement capabilities. Ariba's large, installed base and product strategy helps it take a strong position in sourcing.
In the end, AMR Research believes that provider specialization and users' functional needs will divide the market into three categories: application providers that provide deep e-sourcing capabilities, professional service providers that provide broad change management services, and loose networks of sourcing services providers that provide customized software and service offerings.
Companies in this article
