Global Enabled Supply Chain: e-Procurement

Once the bellwether of B2B, e-procurement software providers may now be on the road to extinction, buffeted by drastically changing market conditions. The world of e-procurement applications is being forced to evolve, but whether or not it can evolve fast enough is another question.

[From iSource Business, November 2001] e-Procurement, perhaps more than any other category of software on the market, represents the volatility of the B2B space over the last year. At the heels of the dot-com revolution, e-procurement software exploded onto the scene, posting 191 percent revenue growth over 1999. Yet, less than two years later, this niche of software appears to have fallen prey to the dangerous pace and unguarded enthusiasm of the e-eager economy.

The long story short, the functionalities of e-procurement applications, namely automated requisitioning, have been commoditized amidst rapidly advancing technology and the introduction of newer, more broad-based products. (If the Internet revolution has taught us nothing else, it has taught us that the most advanced software systems of today likely will be antiquated by the time they are installed on your home or company computer.) In addition, the e-procurement market has had to struggle against a growing frustration among early adopters due to implementation and profitability issues. Together, these things have made e-procurement software a dying breed.

The Trough of Disillusionment

The rise and fall of the e-procurement reign is based on drastically shifting market conditions. According to a recent study by Gartner Research, the e-procurement market today is heading quickly for what it terms the trough of disillusionment, a dip in consumer confidence that is scheduled to reach its lowest point by the middle of 2002.

Many factors have contributed to this disillusionment' among buyers, but chief among them is e-procurement's once robust, but now relatively limited, functionalities. E-Procurement applications have been criticized for their ability to support only certain subsets of product purchasing, primarily white-collar indirect spending on such items as office supplies. Over the last 18 months, enterprises have changed their e-business focus to encompass the more strategic, direct purchasing of   blue-collar maintenance, repair and operations (MRO) products. This shift in focus from white- to blue-collar purchasing has affected e-procurement providers to the degree that these two types of procurement are based on very different processes and functions. Gartner analysts, in a study entitled E-Procurement: Perspective, Preparation and Selection, suggest that, the functional specialization of buying activities demands entirely different functionality and systems integration, depending on business criticality, materials, phase of the procurement process, industry focus and procurement requirements. As a result, most e-procurement suppliers have been unable to adapt to the shift in purchasing focus because of unsuitable applicability in the direct materials field.

The shift to direct procurement does not mean that enterprises no longer have a need to automate indirect MRO purchases. Contrarily, indirect procurement functionality has become increasingly commoditized, drastically affecting its market opportunity and price. Gartner's David Hope-Ross explains that, the buyer criteria [for e-procurement solutions] has fundamentally changed. e-Procurement software solutions are attractive only as part of an overall sourcing and procurement offering. Indeed, e-procurement software soon may not exist as its own entity in the marketplace.

In many cases, e-procurement suppliers, struggling to survive, have sought to be acquired by larger software companies. Major deals of the past year included i2's acquisition of RightWorks and SAP's partnership with the fledgling Commerce One. But most suppliers were not so lucky. Metiom declared bankruptcy following its failure to find an acquiring company and others, like Remedy, Concure and Trilogy, discontinued e-procurement applications as a part of their software offerings altogether.

Buy-side Struggles

For the many companies that did invest in e-procurement solutions this past year, there has been somewhat of a reality check. The startling rise of  e-procurement was met with the usual surrounding hype, allowing buyers to believe that return on investments (ROIs) would be large and almost instantaneously apparent. But e-procurement suppliers, as well as the customer companies, suffered from these inflated expectations.

From the beginning, buying enterprises expected the implementation process to be simple. But, what many executives did not realize was that, for e-procurement to really be successful, it required mass deployment. Pierre Mitchell, an analyst with AMR Research, surveyed e-procurement users and discovered that, Indirect e-procurement is not just self-service requisitioning. Rather, it is a corporate application that supports req-to-check' processing of all indirect goods. It involves mass deployment to thousands of users, while ultimately supporting more complex back-office workflows. Unfortunately, mass deployments require a lot of work and Mitchell adds that this side of the story was not told by aggressive e-procurement sales people or considered by many chief financial officers/CEOs.

With corporations spending more time and money than anticipated on implementation, many e-procurement projects were scaled back or cut short. Delays cost corporations money (as many projects relied on consultants), and created corporate backlash against the new technology. The irony is that, for all its apparent difficulty, a majority of companies that implemented these systems realized significant savings. According to an AMR study, 47 percent of corporations saved 5 to 10 percent on addressed spend categories, and 32 percent saved over 10 percent. These are incredible numbers that any chief information officer (CIO) should be happy to present to a CEO. The bad news, however, is that 45 percent of these firms expected a ROI greater than 100 percent. The savings, although significant, clearly trailed these estimates, and consumer resistance continued to build.

What Now?

In the current market, both customers and enablers are changing the way they look at  e-procurement. Corporations are refining their expectations and learning more sober tactics with which to approach these topics, while software providers are taking user frustrations and new market conditions to heart and radically changing their offerings.

For the customers, the ways in which e-procurement ROI is calculated has been one of the major adaptations that users have made. In the current down economy, corporate information technology (IT) dollars are rationed carefully and loose justifications for investing in e-projects no longer suffice. Consultants are recommending that companies limit initial software deployment, encouraging companies to begin by automating only certain commodity categories. And rather than basing ROI calculations on the whole firm's projected spending, limiting deployment to categories with well-documented spend and connected suppliers will help to produce more accurate ROI calculations.

However the ROI is calculated, it does not change the fact that the hard-dollar savings e-procurement software enables are not readily apparent. Because e-procurement ultimately translates to automated requisitioning and process improvements, it is only e-procurement's soft-dollar benefits, such as reduced purchasing resources, that are seen. AMR's Mitchell suggests that any hard-dollar purchase-price reductions that companies see are the result of improved strategic sourcing, not e-procurement, processes. Mitchell believes that this is why senior management often balks at the cash outlay for this technology that by itself does not lower the purchase prices.

The question of e-procurement's value is certainly up for debate, however. Many believe, for example, that purchase price reductions are a direct result of demand aggregation, citing this e-procurement function as one of its most notable benefits. And still others believe that e-procurement's core automated processes function directly results in the elimination of maverick spending. Either way, the fact that the hard-dollar value of e-procurement is in question at all is a startling shift from its original reputation, and has wreaked irrefutable havoc on the marketplace.

This havoc has taken the form of massive restructuring in which software suppliers have been sent back to the drawing boards. In addition to massive consolidation, another response to the shifting market is to meet the growing need for direct materials software by extending their offerings to this more strategic field. But, for most companies that have gone this route, it has been a lesson in sticking to what you know best. The once monolithic Ariba and Commerce One, for example, had little success with their attempts to support direct-materials procurement. In fact, it did not take long for Commerce One to abandon its direct materials solution in favor of a partnership with SAPMarkets. The lesson learned appears to be that, in order to regain competitive strength, e-procurement providers need to stick to indirect materials.

Aside from focus, e-procurement suppliers in the disillusionment phase must also make serious concessions in terms of price. The major pricing shift to have taken place so far is the virtual elimination of the transaction-charge revenue model for software providers. In fact, Gartner research predicts that none of the transaction-charge structures proposed by e-procurement suppliers will remain intact beyond 2003 (0.9 probability). Licensing costs will dominate and, even then, prices will be greatly reduced.

A Whole Different Ballgame

While e-procurement made a grand entrance onto the private sector last year, its arrival in the public sector has had a more lasting impact. Indeed, a discussion of the current state of e-procurement applications would not be complete without drawing attention to the special role that it has played in the world of government-to-business (G2B) e-commerce. During 2000 and the early part of 2001, the promise of e-procurement was sweeping through state and local government agencies, as it was everywhere else. In fact, a Gartner Dataquest survey of state and local governments taken in 2000 indicated that 85 percent of respondents planned to implement e-procurement over the next three years.

e-Procurement has been attractive to government agencies because of its relatively low cost of implementation and because the majority of materials the government purchases online are indirect, white collar goods. As a July 2001 Forrester report notes, many governments are not able to invest in costly procurement systems, so they have embraced the transaction fee, or self-funding model, of e-procurement applications. Such a model is appealing because it charges participating suppliers transaction fees while requiring no software fees to be paid by the buying organization.

e-Procurement has been hugely popular in the government sector, but, like the private sector, there have been significant obstacles to overcome. While the self-funding model may have been one of the most appealing aspects of e-procurement for governments, as stated earlier, the present market is witnessing a total deterioration of the transaction fee model. Jeremy Sharrard of Forrester explains that, Self-funded models require suppliers to make large initial investments, and governments have failed to deliver necessary volume to make those outlays pay off.

Indeed, e-procurement providers like Metiom and NIC hemorrhaged money by offering a self-funded model, mainly because most government agencies have low transaction volumes and enablers are unable to recoup  their investments. In addition, many studies have noted that this model often sets the false expectation on the user side that e-procurement can be a no cost implementation. In actuality, however, this approach simply shifts the cost from a technology budget to an operational expense.

Despite these obstacles, the public sector may still offer the most promising arena in which e-procurement providers can prosper. Governments, like private organizations, must re-evaluate their expectations and redefine their goals, but the opportunity for significant savings still exists.

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