Global Enabled Supply and Demand Chain Series: Procurement

Despite precipitous market and economic conditions, procurement will make a small, but steady, recovery in 2003.

[From iSource Business, April/May 2003] What exactly is the state of procurement enablement in 2003? While this is a question iSource Business has posed for all the functional areas of our Global Enabled Supply and Demand Chain model (Order/Demand Capture, Sourcing, Procurement, Fulfillment, Logistics, Payment, Customer Relationship Management, Product Lifecycle Management), it's a more cryptic question than ever under the current economic conditions.

A telling analysis specifically about procurement enablement comes from Pierre Mitchell, senior analyst with AMR Research. As he and AMR Research talk to leading organizations about their next-phase investment in procurement initiatives he describes the mood as "cautiously neutral."

"But that's better than cautiously pessimistic," he encourages.

Mitchell adds that the Fortune 1,000s are not worried, or even wondering, about what leading procurement enabler to engage, since they know they can simply source and find the one that will best fit their needs. Instead, what's more critical to organizations today is what they should tackle first in the wide and complex space of procurement management. He finds companies continuing to get more critical and specific on their overall spend. "They're asking themselves, How quickly can I improve my next series of procurement opportunities?' Companies are really wrestling with their approach to procurement issues," says Mitchell. "To them the easy part is finding the appropriate procurement enabler once they've designed the next most critical procurement initiative." And underlying all this is the message that any initiative must be simple, low impact and quick to implement.

This point is validated by more than one study suggesting that projects should be smaller and simpler to engage than in the past. The most well known study on this subject comes from Forrester Research in its November 2002 study called "Navigating the Supply Chain Maze" in which the firm suggests the average-sized project be dramatically smaller in scale and scope.

Meanwhile, automated tools in support of procurement, especially via the Internet, continue at a slow adoption pace. "In the late 1990s we thought everything would happen on the Net," says Antonio Davila, assistant professor of accounting at the Stanford Graduate School of Business and co-author of the new study "Moving Procurement Systems to the Internet." Davila and his co-authors, Mahendra Gupta of Washington University in St. Louis and Richard Palmer of Eastern Illinois University, assert that online purchasing technologies are following a path typical of any business innovation, with a few early adopters moving more aggressively to invest in enabling procurement and the majority of other businesses taking a more conservative approach. Though this note in their research is not new news, their other finding points to the complexities of procurement. "No one technology in procurement is good for everybody," states Davila. With several methods for procuring direct, indirect and services across all divisions of an organization, procurement becomes more challenging than, for example, sourcing.

Mitchell further confirms the complexities of the procurement space by pointing out that procurement is much more cross functional than sourcing, and much more about workflow and high volumes. "Effective procurement requires implementation across functional silos and, as a result, procurement becomes more complex," explains Mitchell.
It's in this setting that the business community tries to understand the state of procurement.

Both Aberdeen and AMR Research give us overall 2003 growth predictions. Boston-based Aberdeen Group's latest investigation of supply chain management (SCM) technology shows that the buying intentions of more than 160 enterprises clearly indicates the "worst is over for the SCM technology and procurement markets."

"An overwhelming majority of enterprises indicate that spending for SCM and procurement solutions this year will remain the same or be greater than 2002," says Aberdeen's Tim Minahan, vice president of supply chain research. "However, the bulk of spending will come in the second half of this year. Solution providers are validating these findings with most indicating that their sales pipelines are the largest they've been in years. However, it's clear that some suppliers will not be able to hold out until spending loosens up in the Q3/Q4 time frame. So we expect to see some accelerated consolidation and mergers and acquisitions activity this year."

According to AMR Research, the sourcing and procurement market will grow 12 percent, from $1.65 billion in 2002 to $1.83 billion in 2003. Indirect procurement will grow 5 percent, from $691 million in 2002 to $724 million in 2003, with positive growth only resulting from the top three enterprise resource planning (ERP) suppliers penetrating their installed bases with e-procurement products. In its latest estimate on the overall market, AMR Research also reports that the enterprise application software market will grow a "scant 3 percent in 2003."

So, Anything New?

Now you know what the analysts are predicting for the coming year, but what's actually going on right now in the procurement market? Our analysts, again, share some interesting trends.

Says Aberdeen's Minahan, "Two key trends in procurement are the shift to outsource certain processes or spend categories and the focus on categories of spending  particularly services  that have traditionally been poorly controlled and managed outside the procurement department."

In its study, "Best Practices in Online Services Procurement: Travel Print, and Contract Labor," Aberdeen says automated procurement systems have clearly proven in the past several years that they are capable of "driving cost and process efficiencies in the control and management of goods procurement." Unfortunately, these same solutions address less than half of the indirect spend opportunity. "Services represent the majority of businesses' operational spend, but they require a high level of product and pricing configuration, which defies traditional catalog-based e-procurement," write Aberdeen's analysts. "In addition, services require collaboration across departments and outside the organization with third-party providers, thus contributing to high rates of inefficiency and off-contract buys. Furthermore, as the economy shows few strong signs of revival, companies are turning more and more to outsourced services to be responsive to the ups and downs of the market as it recovers." With this environment, Aberdeen sees a surge in online services procurement in the near term.

AMR Research believes that direct procurement is the number one area that organizations will implement in the procurement mix. AMR Research's Mitchell notes that since indirect procurement is more about category spending and catalogs to eliminate maverick spending, while direct procurement is more about supplier relationship management, companies should select procurement initiatives that respond to their greatest concerns. "Pick your spending pathway for indirect and for direct procurement, and outline a plan that allows you to respond to what you want to achieve in improved supplier relationship management."

The continued top down emphasis on cost reduction will continue to push firms to aggressively commit to procurement enablement. "Seventeen percent of the companies that don't have sourcing and procurement applications today plan to implement them within the next 12 months  the highest percentage of any major application category," reports the AMR Research study "Enterprise Application Outlook for 2003: The Performance-Driven Enterprise."

What Will Customers Get from Enablers in 2003?

"Whatever they want," says Minahan. "This is truly a buyer's market. Procurement solution functionality has matured greatly over the past few years, addressing new enterprise requirements and spending categories, such as services." Early adopters and solution providers have also developed strategies to at least ease the hurdles to effective e-procurement deployment, according to Minahan, especially supplier enablement and content management. However, during that time, ERP suppliers have caught up, introducing feature-competitive offerings of their own. Minahan further suggests that this has put pressure on solution pricing. "The result for buyers will be more robust solution functionality at lower license fees," he says.

"From a project standpoint reasonable optimism exists amongst the ERP players," says Mitchell. He indicates that every one of them  PeopleSoft, Oracle and SAP  have built greater functionality into their procurement modules.

AMR Research predicts Ariba, ICG Commerce and ePlus will come on strong in this market. Additionally, with SPS Commerce helping enable suppliers and SupplyWorks, Eventra, Entomo and SAQQARA staking out strong positions in their respective niches, the market will be working hard to enable the eager customer.

In short, AMR Research says, "The fragmented procurement market with hundreds of suppliers will certainly be fueled by Ariba, FreeMarkets, PeopleSoft, SAP and Oracle, but it will also see growth from services hybrid suppliers such as Zeborg and ICG Commerce, supply chain suppliers, industry-specific suppliers and product lifecycle management (PLM) suppliers." The firm goes on to say that while consolidation will certainly continue, the complex nature and high return on investment of supply management initiatives will provide fuel for growth in 2003.

Contract management, a critical component to enabled procurement, is also getting more attention. Key players in this space, like I-many, are positioned well for 2003.
In the online services procurement arena, Aberdeen Research Director Christa Degnan suggests that customers watch Elance (which recently acquired CascadeWorks), Fieldglass and IQNavigator, which started out automating the procurement of contract labor but are now adding support for more complex services and projects, and they are the best positioned of the niche players to tackle services as a whole.

In travel, GetThere has been the firm to beat, but e-Travel, KDS and Outtask have emerged strong, with the latter two having complimentary expense management automation (EMA) technologies to provide more value and help with user adoption.

In print it's Httprint, Noosh and Printcafe. Also watch for Ariba to beef up its support of services categories across its enterprise spend management suite in the late spring or early summer time frame. Additionally, Oracle is expected to come out with something concrete this fall, and PeopleSoft continues work on its services procurement module sPro.

When we look back on 2003, we may consider this the turning point for procurement enablement and all other areas of enterprise software applications. It will be the make-it-or-break-it year for certain software suppliers, and it will be the year when, in particular, the suite of procurement technologies really flex their muscles.

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