Up Next: Online Purchase of Services

You can search for products online, but what about services? Despite service suppliers' reluctance to move online in certain industries, it is nonetheless the next phase in B2B sourcing practices.

[From iSource Business, January 2001] Even on a good day, soliciting bids from building contractors "can take forever" says Daniel Levine, president of Levine Properties, a developer of commercial real estate in Charlotte, N.C. So when Levine heard of a B2B commercial real estate services marketplace that might automate this paper and phone intensive business ritual, he jumped to investigate.

Called avidXchange.com and supported by Clarus eMarket technology, the site boasted of the latest in bid management solutions, helping users compare complex and oftentimes widely divergent offers in an apple to apple format, so to speak.

It also tracked spending trends and other various supplier statistics in this $82 billion marketplace.

Impressed, Levine began advising avidXchange in its real estate operations. More to the point, he also used the exchange to invite contractors to bid on Levine Properties' most recent venture  a $2.3 million, 52,000 sq. ft. office building. A day and a half later, Levine had found his contractor.

avidXchange is by no means the perfect solution to his bidding woes, Levine says. The contractors he invited to bid had to be pre-selected, a step he can't ever envision abandoning for the convenience of total automation. Also, service suppliers have been reluctant to embrace sophisticated e-procurement solutions. "It will take time to educate the contracting community," Levine believes. Yet he is still very excited about avidXchange's potential. "We feel we got the right price for this project. And ROI," he adds, "is essentially unlimited."

Given the rapidly growing sophistication of technology  not to mention of buyers  it was inevitable that procurement of business services would start to move online. Although not nearly as automated as a cyber-purchase of goods or materials, it is nonetheless the next phase in B2B sourcing practices. And as an added bonus, it also could transform how companies price and compare business services  online and off. Call it part two of the e-procurement revolution.

Services Purchases Online

Like every other industry, commercial property management has been ripe to gain from the cost savings and supply chain efficiencies of an e-procurement solution  be it supplier supplied or through an industry exchange. Both Goldman Sachs and Bank of America, for example, have independently projected that online property management exchanges could increase net operating income by two to five percent, translating into an annual savings of over $200,000 for the average property manager.

Unfortunately, says Mike Praeger, chief executive officer of avidXchange.com, "real estate has traditionally been a market reluctant to adopt technology, especially when it came to services."

Now, this reluctance is fading  and not only for the real estate industry. "It has really been interesting to watch how e-procurement has progressed over time," says Kevin Costello, managing partner of digital market solutions for Arthur Andersen. "A year and a half ago, we were putting in e-procurement systems and using them to buy paper clips and other such office supplies. Then we moved into purchasing goods that were a little bit more sophisticated such as configurable parts. Now it is clear we are moving into another new phase  the purchase of services online."

The market forces behind this newest incarnation of e-procurement are largely the same as the ones that drove the wholesale purchases of materials, repairs, and operations (MRO) equipment and strategic goods online: Companies want to save time (both in delivery of services and for their own internal procurement staff), they want to save money (both the cost of processing the purchase and the actual price of the service itself) and they want to better track and account for corporate expenditures while leveraging their overall spend. "The way people think about services has really begun to change," says Christine Ross, an analyst with Forrester Research. Even a short while ago, the concept of commoditizing services was alien to most companies, she says.

Clearly though, a number of companies have begun to think of services exactly in this way. In a survey conducted last year, the Cambridge, Mass.-based consultancy found that 59 percent of firms contacted were purchasing services online. And although the median amount purchased online was only $1 million per company in 1998, that number is projected to rise to $66 million  or 13 percent of total services spending  by the end of the year.

"Buyers have become more comfortable purchasing sophisticated business services online," agrees Jim Zuffoletti, vice president of Market Making for FreeMarkets B2B e-marketplace. Services put out for bid in FreeMarkets include tax preparation services, electricity and rental car rates among others. Altogether, FreeMarkets has bid out over $1 billion in online services with an average savings of 15 percent, Zuffoletti estimates.

However, even the most ardent fan of the technologies that have automated the procurement of goods might find the prospect of purchasing business services online somewhat dubious  and for good reason.

Commercial services are an amorphous  not to mention intangible  business component and present special problems in their sourcing, supply and delivery. "Even though companies are using the Internet to order services, they are still delivered through traditional methods," notes Forrester's Ross, with the accompanying traditional delivery problems. And unlike products, which can be manufactured at a quantifiable rate for a specific price anywhere in the world, the cost and availability of certain services is extremely dependent upon their supply in the local market. Just ask any company that has tried to hire IT staff lately.

Another factor is the catalog model, which, even though companies routinely use it to purchase all sorts of strategic goods and general office products, can be difficult to configure for services. And while the latest strategic sourcing solutions that set up customized business rules for supplier selection and have very sophisticated work flow mechanisms have made the purchases of services online easier, it is still not as easy as the purchase of a tangible product.

Finally, no amount of technology can replace the human factor  conventional wisdom that is true of any e-procurement solution  but doubly applicable when purchasing complex business services that usually requires a lot of give and take between buyer and seller. In fact, given the complexity of some of these transactions, there are some analysts who feel that no level of technology will move them online. "When you really peel back the onion, you will find there are two classes of legal, advertising or telecom services," says C.V. Ramachandran, a partner with Booz"Allen & Hamilton in New York. "One is a fairly standard set of services, which you can engage anyone to do online, such as preparing papers to purchase an apartment for example. The other set of services is very customized and very unique to the client's needs. We think market exchanges will work very well as a clearing house and for setting a competitive price in a particular region for the first group." The second group, he says, will probably never lend itself to an e-procurement solution.

Having said all that, the procurement of services online is still a trend that many believe will be de rigour for competitive companies within a year. "If you cannot procure services online you will find the volumes you can put through a procurement tool or system inadequate," says Jeff Helfer, CEO of AlphaDog Procurement Management, a provider of outsourced procurement solutions. "There aren't enough categories of goods to justify the cost of these applications."

And while not every company might have run the numbers to come to such a conclusion, most folks realize there is something to this newest trend  and are willing to wait out its growing pains.

The biggest motivator  for the moment  is cost. Services make up between 60 to 80 percent of indirect purchasing, and those companies that can reduce those costs will have a competitive edge. And while the technology still causes some head scratching among IT staff, service providers such as Commerce One, SAP and Clarus are building new functionalities into their platforms, namely contract management and bidding capabilities, that will make purchasing of services easier. Other providers, such as GetThere.com, are concentrating on one particular service  in this case travel. And more and more marketplaces such as avidXchange.com are serving this particular market space (see sidebar) and availing themselves of the latest strategic sourcing technology.

"Our customers create bidding templates for each service they are procuring," explains avidXchange's Praeger who uses the example of a telecom service to make his point. "Key criteria might include a percentage of guaranteed uptime, which would have its own line item, or a penalty clause if the service provider failed to meet that uptime.

"A supplier bidding on this contract might say it guarantees 98 percent uptime with a 20 percent penalty fee tacked on if it fails. Another supplier might guarantee 99 percent uptime with a 10 percent penalty fee." Other elements of the Clarus software allow the customer to weigh which criteria is more important and then make a decision, he says.

But perhaps the most intriguing reason driving the demand by companies to purchase services online is the knowledge base it is creating along the way. For one reason or another the fees of many types of services  be it legal, telecom, systems integration, accounting or even travel to a certain extent  are largely a subjective affair. As services move online, that promises to change.

"It is possible, through the Internet, to get significantly greater knowledge of the cost structures of, say, legal firms and to bid those out more openly," says Roy Anderson, director of purchasing for John Hancock's Insurance Co. Law firms and consultants, he says, are notoriously "anti pricing model" and it is difficult to get any sort of uniform pricing information on an industry basis. "However with the appropriate Internet strategy, the vast majority of such services can be commoditized."

At What Price?

When Steve Andon, CEO of CyberCom, a provider of high-speed hardware and software that supports companies with their Internet services, needed legal expertise he felt was beyond the scope of his regular attorney he turned to a legal marketplace called Sharktank.com. While it is not an auction site, users submit a request for legal services to which participating attorneys respond with such information as experience and professional rates.

Sharktank, Andon says "gives users a bird's eye view of the landscape. You might see three different attorneys specializing in the same area with different levels of expertise and different rates."

Clearly Andon has leg work left to do, such as interviewing the attorneys and reviewing his situation in person  an exercise almost besides the point in the face of the pricing information he has gathered.

"e-Sourcing services, using a model like Sharktank, are even more valuable than the e-sourcing of goods," says Tom Ciampa, CEO of the exchange. "There is fairly good information regarding supply and demand and price of products. With certain services, there is nowhere near this level of information available," he says. "You cannot truly comparison shop and find the most appropriate service provider without this information."

And while e-sourcing of such sophisticated services online will probably never be completely automated (as Ciampa explains "to truly advocate your client's interests you have to sit down with that person and solicit information he didn't think to give you") companies are clearly pursuing what they can, for the price efficiencies if no other reason.

avidXchange's Praeger, for example, says that while the exchange does hold competitive bidding for certain services, it is becoming more than a one-time transaction for many companies. "Clients are taking that rate and creating a catalog with it for use throughout the year," he says.

Anderson of John Hancock reports: "We have begun creating a matrix of what the cost structure is for certain skill sets based on information we have been able to get from the Internet."

To be sure, other information besides price can be reaped from these sites and software systems. "There are more than 1,000 movers in New York City and only two will do hoisting" [using a pulley to haul furniture out of windows], says Gene Lemay, CEO for MoveNet.com, an exchange for employee relocation services that is powered by Emptoris software. "It's not just about price," he says a point that Praeger and Ciampa are quick to emphasize as well.

Quality of the service provider and its capability ("out of 1,200 movers maybe 300 might move pianos") are often just as important as a price estimate. Until recently, weighing these seemingly unquantifiable elements was not easy, Lemay says. But a new breed of e-procurement software has made it possible for "the RFQ and RFP to be based on more than getting a good price," Lemay says. At least companies now can tell if they are getting a good price at all.
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