The Analyst Corner: Sourcing

Sourcing is an area where knowledgeable technology investments can lead to a solid return on investment. With the market growing, companies are placing their bets on this sure winner.


Sourcing is an area where knowledgeable technology investments can lead to a solid return on investment. With the market growing, companies are placing their bets on this sure winner.

[From Supply & Demand Chain Executive, June/July 2004] Like the sound of the starting bell at the horse races on a balmy day, the January announcement of the Ariba/FreeMarkets merger excitedly shot e-sourcing consolidation out the gate at breakneck speed. Beyond market consolidation, the pace of activity in the enterprise-wide e-sourcing space is clipping along well due to several interesting issues.

The previous economic crisis, globalization and advances in Internet-based sourcing make strategic sourcing a critical business initiative for 2004, according to the leading information technology (IT) research firms. Additionally, a recent Wall Street Journal special section entitled "Adventures in Cost Cutting" highlights how important total cost management currently is to corporate America. In fact, some contend, minus layoffs, only healthy strategic sourcing practices successfully lead organizations toward better management of their costs.

Certainly leading-edge organizations know the formula: Correctly place core strategic sourcing steps, followed by plugging in robust technology. The result means effective strategic e-sourcing will dramatically reduce transaction costs, increase market transparency, and instill discipline and consistency into the sourcing process.

"The past three years have highlighted the importance of supply management to overall business success," comments Tim Minahan, senior research analyst with Boston-based Aberdeen Group. "Unable to grow revenues, companies were forced to develop strategies to rein in costs and to maintain profitability. Increased globalization also required companies to develop strategies to leverage new markets — without impacting service levels or increasing risks. Leading enterprises have found that supply management, in general, and strategic sourcing in particular, offers the largest and most direct opportunity to achieve these goals."

Toeing the Morning Line

Last year Boston-based AMR Research estimated the sourcing software and services market to be approximately $1.6 billion for 2002, and predicted that it would reach $1.9 billion by the end of 2003.

They were pretty close to the mark. The sourcing software and services market for 2003 ended up at $1.86 billion, and AMR projects this market to round off at $2 billion by the end of this year, representing a compound annual growth rate (CAGR) of 7 percent. This is consistent with AMR's prediction that the e-sourcing market will grow an average of 5 percent a year through 2008.

"This is a healthy growth rate for e-sourcing," says Pierre Mitchell, senior analyst with AMR Research. "And, again, the [enterprise resource planning (ERP)] players will be driving a lot of this growth."

Mitchell highlights the ERP position in the market by pointing out that SAP took the No. 1 spot in e-sourcing license revenue from Ariba last year. SAP's 2003 license revenue was $250 million compared to Ariba's $100 million.

The lion's share of e-procurement and e-sourcing revenue still comes from application software licenses (37 percent) and implementation costs (38 percent), according to AMR's latest research. And application hosting/subscription revenue has gone from just 6 percent in 2001 to 10 percent in 2003.

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