e-Procurement: Still Early on Adoption Curve

But as perceived risks lessen, "laggards" will pick up pace, researchers assert

Stanford, CA  December 30, 2002  Despite early hype, e-procurement still accounts for just 2 percent of total B2B purchases, but that figure will rise to 11 percent in the next two years as increasing numbers of companies come to view electronic purchasing as less risky, according to a new academic study.

While market analysts in the late 1990s were predicting that B2B online transactions would increase from $600 billion in 2000 to over $6.3 trillion by 2004, growth has been much slower than expected, and only gradually have businesses begun to experiment with e-procurement, according to the authors of the new research.

"In the late 1990s, we thought everything would happen on the Net," said Antonio Davila, assistant professor of accounting at the Stanford Graduate School of Business and coauthor of the new research. "Market analysts, journalists and investors built up too many expectations."

But in their research paper, "Moving Procurement Systems to the Internet," Davila and coauthors Mahendra Gupta of Washington University in St. Louis and Richard Palmer of Eastern Illinois University, do not sound the death knell for e-procurement technologies. Rather they 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 e-procurement and the majority of other businesses taking a more conservative approach.

Part of the reason that adoption has been slow, Davila pointed out, is that businesses face a dilemma: "They are not just betting on the technology, but also on which technology." No single system yet dominates, he notes, and several means of procuring goods and services online have emerged, including e-procurement software, e-marketplaces, B2B auctions and purchasing consortia.

e-Procurement software distributes electronic catalogs to customers, whose employees can use them to make purchases online. e-Marketplaces are Web sites for buyers and sellers who trade online for goods and services with dynamic prices. B2B auctions are sites that facilitate bidding for goods and services. Purchasing consortia gather the purchasing power of numerous buyers, who negotiate for price discounts.

These systems serve a variety of different purposes, Davila said. "No one technology is good for everybody." For example, large corporations tend toward e-procurement software, while purchasing consortia seem to suit smaller companies, according to Davila. So while the multiplicity of choices slows adoption, it also allows users to match the method and their needs. Eventually, the "final equilibrium may include several technologies, each one serving a different segment of the market," the researcher suggested.

Another issue slowing the adoption of e-procurement technologies is their perceived risk. Executives worry that these technologies will be difficult to integrate with existing information systems and that they may alter the relationship between suppliers and customers. Executives also are concerned about security and control mechanisms.

As might be expected, the researchers found that aggressive adopters see e-procurement as low risk. Organizations pouring the most resources into e-procurement also seem to be better positioned in more predictable market environments. They tend to rank higher in many aspects of their competitive position  including brand image and customer service  than more conservative adopters, or "laggards," who have completely avoided adoption.

Today many businesses experiment with e-procurement only in their non-core areas, such as when buying office products, or with maintenance, repairs and operating (MRO) expenses. Inventory, services and capital goods are far behind, although it is expected that the most savings eventually will be found in these core areas.

Davila believes that increasing numbers of companies will give e-procurement a try in the next two years, including experimenting in core goods and services, such as computer companies using it to purchase microprocessors and memory chips. From a survey of 168 purchasing managers, the researchers estimate that e-procurement-enabled spending will rise by 433 percent and expand from just 2 percent of total purchases today to a more sizeable 11 percent as once conservative businesses see lower risks in using e-procurement and the market begins to progress more rapidly through the adoption curve.

Benefits could be substantial. e-Procurement users reported a hefty savings of 42 percent, on average, in purchasing transaction costs in the researchers' survey.