Cost control has companies re-evaluating their commitment to sourcing apps, especially as best-in-class firms are driving high returns from the technology.
[From Supply & Demand Chain Executive, October/November 2003] Sourcing. While still somewhat tight, the overall sourcing arena is beginning to be a good market in which to sell software, and it's a good market in which to buy software. Now doesn't that sound good?
In its June 2003 report on the procurement and sourcing applications market, AMR Research says, Macroeconomic malaise and the bells tolling for some best-of-breed suppliers dragged the procurement and sourcing market down 9.5 percent in 2002, but high returns on investment (ROIs) and the trend toward integrated supply management support will fuel 10 percent growth during 2002 to 2007.
Take a reflective walk down memory lane and chances are you'll bump into the historical markers that remind you of the B2B Internet craze of 1998 to 2000. e-Procurement and trading exchanges were the two hottest topics, and suppliers like Ariba and Commerce One were at the top of their game.
Then came 2001.
The procurement and sourcing space became a tragic play of small suppliers struggling to survive while users hunkered down to digest the applications acquired in the B2B buying binge.
In its report, AMR Research says, The overall procurement and sourcing market grew only 19 percent to $1.9 billion in 2001 (a far cry from the 162 percent growth posted in the wonder year of 2000), and 2002 has put its stamp on the market that finally fell back to earth, shrinking nearly 10 percent.
But why is AMR predicting 10 percent growth during 2002 to 2007? Says the Boston-based research firm, The bottom line is that even though this young technology market experienced a boom-and-bust cycle, economic markets are generally efficient, and the triple-digit ROIs of procurement and sourcing projects especially as they broaden to higher-impact supply management processes will continue to fuel the market.
David Metcalfe, Ph.D., research director for Forrester Research in the United Kingdom, says that if you look at the predicted growth of the sourcing market globally, you should divide North American and Europe, since the numbers are quite different. The consulting part of the sourcing business in the United States is not growing more than 10 percent, he says. But in Europe, consulting will grow 20 percent. U.S. software licenses [in sourcing] will probably be broadly comparable with the consulting growth in the United States.
The Yankee Group out of Boston has an even more aggressive growth estimate. They expect the sourcing and procurement application market to grow by 25 percent in 2004 compared to 2003. We've discovered significant pent-up demand for leading-edge enterprise software that interacts with customer and supplier, says Jon Derome, senior analyst for The Yankee Group. Once budgetary resources are available, then customer- and supplier-facing solutions will be a priority.
As AMR suggests, from 1998 to 2000 the business community witnessed high innovation and competition that forced large technology suppliers to pay attention to the sourcing and procurement application market. Their report goes on to state, It also forced users to take a very hard look at their organizational, process and technology architectures particularly when best-in-class firms were getting a disproportionately high return from these technologies compared to those that sought the system as a quick-fix solution to their supply management ills.
Considering all these factors, users have a lot to look forward to in the coming months from the sourcing application market.
The Current State of Affairs
The buzz this year has been the top-down emphasis on cost reductions, driving leading firms to aggressively employ all the tools procurement and sourcing applications have to offer.
Says Forrester's Metcalfe: The resurgence in sourcing and procurement applications is largely because in this current business cycle there's a huge focus on cost control.
Pierre Mitchell, vice president of research for AMR Research, adds, From a corporate standpoint, sourcing has always been active. What's really picking up is the interest and response from the slow adopters.
Corporations that have already engaged sourcing applications are showing great gains. In addition, management's pressure to deliver on efficiency savings that their competitors are realizing is influencing interest not seen before. Given the fact that early adopters are realizing 10 times the return on investment, it becomes a very strategic issue.
So if the right sourcing applications will support an organization's systematic sourcing processes that is, applications that support global sourcing programs, not just bidding events and apply true automation of the step-by-step strategic sourcing process, then what are companies newly interested in this application looking for? The analyst firms list the following:
- Contract management Closing the loop on the sourcing process ensures that different procurement systems are executing against corporate sourcing policies, especially in complex services spending that is not managed easily through e-procurement catalogs or enterprise resource planning (ERP) item masters and purchase orders. While this market segment size is only about $200 million, automated contract management is a key component of any procurement and sourcing effort.
- Supplier performance management (SPM) SPM guides both supplier rationalization efforts and joint supplier collaboration efforts with persistent supplier relationships.
- Niche technologies These attack more complex, strategic spending categories. For direct materials, this is where strategic sourcing, product lifecycle management (PLM) and the supply chain converge toward integrated supply management.
As a result of these functionality requirements, ERP players are raising the bar. The increased interest by ERP suppliers in developing and marketing sourcing technology has become very evident, says Yankee Group's Derome. Don't forget that the ERP players have the luxury of viewing the huge revenue opportunity in their current installed base. As a result, they'd be foolish not to take advantage of this tendency in the marketplace.
Furthermore, Derome states, SAP and PeopleSoft have invested significant resources in the sourcing and procurement application market.
With so much going on in the market and a bright light shinning at the end of the tunnel, Supply & Demand Chain Executive was curious to hear about surprises in the sourcing application market, of which there are quite a few.
Derome had two points on this. First, the market did not accelerate as much as we anticipated in the first quarter of 2003, he comments. Second, the amount of interest in the marketplace in spend technology and spend technology to aggregate and manage spend data is bigger than expected. We're picking up a clear trend of growing interest in spend visibility technology. This interest in spend data, as well as the ability to manage and aggregate the information to make better business decisions, is the obvious reason users want visibility.
Derome discussed the new opportunities eXtensible Markup Language (XML) and Java standards offer, creating a less expensive environment to gather data across multiple systems. Plus, suppliers' products have matured to an extent that they allows organizations to consider a software product to gain spend visibility instead of spending that money on consultants.
A pleasant surprise for Metcalfe is the increased use of the Internet by purchasing and supply management professionals. In the latest ISM/Forrester report on e-business, the responses from 291 professionals revealed that 66 percent are using the Net for the request-for-proposal (RFP) process. This is an interesting number in itself, says Metcalfe, because the consistant growth in this area shows the significance of Internet-based purchasing. If you look back a few years ago, everyone was talking auctions. The sweet spot on online sourcing is not auctions.
Another interesting fact Metcalfe draws from the report is that low-volume direct materials spenders narrowed the spread with larger purchasers, purchasing 9.1 percent of their direct materials online, up from 6.7 percent in Q4 2002. From our results, the findings show that the Internet is mission-critical for procurement, he says.
AMR's Mitchell points to a more obvious concern in the arena of surprises. One surprise for many of us is that the quality of information for supporting corporate sourcing is still very poor, he says. Take the fact that most corporations still cannot determine what percentage of their spending is actually maverick. What's the leakage? If that could be captured, most corporations would not only understand their true spend more clearly, but they could also more effectively clamp down on this problem. Plus, a corporation's desire to track spending by supplier and by commodity is still difficult. Even today, this poses a big challenge for organizations.
The big players are easy to spot. Ariba, FreeMarkets and the big three ERP suppliers command nearly half of the sourcing and procurement market. And, according to AMR Research, in a market populated by more than 100 suppliers, the top five suppliers comprise 48 percent of the overall market. While ERP suppliers are generally favored by chief information officers looking to reduce IT complexity, Ariba and FreeMarkets will continue to be favorites of chief financial officers and chief purchasing officers particularly in large firms with heterogeneous back-office environments. For the rest of the market, high growth (more than 20 percent) is coming from e-sourcing suite suppliers, sourcing services suppliers, contract management suppliers and business intelligence suppliers.
AMR Research goes further in assessing the market with the following: Consolidation took its toll and will continue through the rest of this year with niche reverse auction tools being the first to go. Perfect Commerce bought MaterialNet and PurchasePro (which, in turn, bought Baybuilders). Moai merged with Medebiz, and Procuri's traction in selling its hosted, self-service e-sourcing suite makes it a ripe candidate for strategic moves. e-Procurement supplier Clarus became worth more dead than alive, so it sold off its technology to Epicor. eScout bought Commerce One's trading business, CommerceOne.Net.
And if that wasn't enough to digest, in the direct procurement space AMR Research reminds us that BlackHog turned to bacon, Eventra is on the blocks, GXS was purchased by Francisco Partners, and many hosted integration firms are similarly targets to more successful Internet-based electronic data interchange (EDI) and supplier connectivity firms like SPS Commerce or EC Outlook.
In the contract management area, I-many acquired Menerva, and e-sourcing suite supplier B2eMarkets acquired Diligent. The popularity of contract management with users and the number of tiny suppliers will certainly lead to continued acquisitions.
In the content management area, PeopleSoft acquired Cohera; Cardonet and Poet are struggling; and Requisite, SAQQARA and ePlus are battling it out tooth and nail for market share. Lastly, industry-specific suppliers will need to stay lean and mean to survive, and category-specific suppliers like Elance for services procurement or Noosh for print procurement will engage in a similar struggle before being acquired by larger suppliers.
Set to Lead
So we must all beg the question: Who is set to lead in the sourcing application space?
For Metcalfe, when looking at the consulting piece he can still acknowledge FreeMarkets, though they will struggle with software-focused suppliers that began with a self-serve tool. He also suggests watching for PeopleSoft and SAP to make more of an impact. He has an overall positive outlook for Ariba, highlighting their fantastic customer base.
Derome suggests that companies that don't already have a leadership position will continue to be dependant on their vertical market strategy, also noting that Ariba has done a lot to extend its products' footprints.
Finally, the analysts pose the big consolidation question as it relates to the larger e-sourcing suites from software suppliers such as B2eMarkets, Emptoris, Frictionless Commerce and MindFlow. To them, MindFlow looks very attractive to ERP or supply chain firms, with some currency to play with. The other three continue to innovate and lead the way in terms of automating global sourcing programs led by advanced corporations. They will eventually need to be acquired or, if going it alone, dive heavily both into verticals and/or merge with some services-oriented suppliers, the analysts suggest.
What to Watch For
What can the buyer or user of the technology expect in the next six months? Plenty, says Metcalfe: I would focus on the application providers' spend analysis capabilities. At the end of the day, if you cannot break down your spend, you won't know what's going out.
In addition, Metcalfe advises users to watch for sourcing applications that have improved integration with PLM applications. This is so important to the entire mix of an organization's supply and demand chain requirements. The only provider doing a real good job of this is MatrixOne.
The Yankee Group's Derome also suggests that users can expect more capabilities from the spend management area in the sourcing arsenal. As standards mature (UCCNET, CIDX, RosettaNet), take advantage of those data standards to move data to maximize your demand chain. Supplier score-carding and supplier performance management have some interesting technology developments going on, too.
Mitchell speaks to the market in general. Look for even more consolidation. There are still too many technology suppliers in this area. Consolidation is good for a young market; it builds good choices.
And don't forget to watch for business intelligence analytics to be a long-term trend to watch, Mitchell adds. You have lots of good choices in the tool set.
For those companies that want to close their performance gaps in sourcing and supply management, just throwing any type of software application at their needs is clearly not the solution. Instead, more pragmatic, services-intensive, value-focused, benchmarked, best-practices-guided, and industry-specific implementation of technology conducted in lock-step with process and organizational change will lead to a slower, albeit lasting, growth in the procurement and sourcing market during 2002 to 2007, predicts AMR Research. So, yes, it's time to buy the right system to support your organization's strategic sourcing needs. But the time-honored adage still stands: buy smart.
To learn more about the sourcing space of Supply & Demand Chain Executive's Global Enabled Supply and Demand Chain Map, check our version 6.0 of the map on SDCExec.com.