Where Are We Going?

Julie Murphree, editor-in-chief of iSource Business, looks at industry trends in the supply chain management (SCM) and e-procurement software markets

Ever so slowly, the supply chain management (SCM) and e-procurement software markets are emerging from an economic period of unprecedented volatility and consolidation. These markets have truly experienced a roller coaster ride in the last 12 months, and the market slowdown is clearly seen in the revenue and earnings shortfalls experienced by the software providers. Two prime examples, Ariba and Commerce One, both experienced recent earnings shortfalls and announced reductions in their workforces. Other signs of weakness include Metiom's declaration of bankruptcy; Remedy, Concur and Trilogy's discontinuation of e-procurement; and PurchasePro's recent management and financial turbulence.

With more than 30 acquisition and partnership announcements that include Commerce One and Exterprise, i2 Technologies and Aspect Development, i2 and RightWorks, FreeMarkets and Adexa, PurchasePro and Bay Builder, Ariba and Syncra Systems, and Commerce One and SAPMarkets, SCM, e-procurement and sourcing providers are scrambling to connect current software functionality with related applications for comprehensive technology offerings. Vernon Keenan of Keenan Vision explains that CIOs see value in these tools but currently question the maturity of the software.

As this market adjusts and matures, software providers are working to redefine their offerings. Gone are the days when the FORTUNE 500s rushed into multimillion-dollar e-procurement contracts with expectations of return on investment (ROI) rapidly following implementation. You might hear a provider promise an integrated SCM/e-procurement software suite during a presentation, but industry analysts claim that much of this is still vision. As a result, CIOs and cross-functional technology teams must select from a range of early-stage solutions from more than one provider. But this is changing, and the market has some exciting developments down the road.

The Market in its Current State

The National Association of Purchasing Management (NAPM) and Forrester Research provide a good evaluation of the current state of the SCM and e-procurement software markets. The NAPM/Forrester report on e-business indicates that over 70 percent of U.S. firms have purchased some indirect materials online and more than 40 percent of companies have purchased some direct materials online.

However, when looking at actual activity over a three-month period, the numbers are much lower, according to NAPM/Forrester. Only about 5 percent of companies bought more than 30 percent of their indirect materials online, and about 75 percent of companies bought 5 percent or less of their indirect materials online. For direct materials, again only 5 percent of companies buy more than 30 percent online, while a whopping 82 percent bought less than 5 percent online.

When looking at e-procurement early adopters, the report found that firms were rolling software applications out in order to lower costs, but could not quantify actual savings. Projects were also slow to roll out because of high user resistance and slow supplier adoption. For those organizations successful with their implementation and user acceptance, in addition to tracking the ROI, iSource Business has been able to report numerous individual success stories. Statistically, however, these numbers are hard to track.

And according to the same NAPM/Forrester report, supply chain management applications are shifting in focus from internal to external as dynamic collaboration moves to the forefront of supply chain efforts. According to the user surveys of Global 2500 supply chain executives, these outward-facing applications will make up 73 percent of buy-side applications, 61 percent of make applications, 39 percent of move applications, and 17 percent of monitor applications by 2003.

Gartner Research states that integrated solutions will be incomplete and plagued with functionality gaps and integration challenges through 2003. Gartner also recommends that cross-functional technology teams about to purchase this market's technology distinguish fact from fiction and carefully manage enterprise expectations.

Bottom line: The market has faltered but will eventually come back strong as organizations commit to more mature technology. Software suppliers unable to offer the more integrated and powerful solution will either be acquired (as we have already seen) or be relegated to niche market positions. The exciting news is that this environment offers enormous room for growth and increased use of SCM and e-procurement software.

Just How Big Is the Market?

The numbers vary from report to report, depending on whose study you're reading. AMR Research puts the size of the SCM market for 2000 at $5.2 billion and growing. AMR goes on to state that overall SCM revenue growth was at 36 percent last year, with dominant supply chain planning suppliers leading the way. In addition, as organizations try to integrate supply chain efficiencies beyond their own four walls, collaboration applications based on Web architectures began to show momentum, with supply chain collaboration license revenue growing 87 percent and Web architecture licenses growing 257 percent, according to the same report.

Forrester Research numbers are somewhat similar in this market space. Forrester counted supply chain application spending for 2000 at nearly $4 billion. Of course, we have to wait for the final numbers for 2001, but most analysts are willing to report anywhere from a 3 to 6 percent increase in spending in this area despite what happened to the economy (and some may contend these current estimates are conservative).

Future Forecasts

Again, it's a numbers game but every technology research group is posting growth. Forrester Research gives a $6.2 billion growth projection by 2005. AMR Research, again, is similar at anywhere from $6 to $8 billion by 2005.

Says Forrester, Today, firms are deploying inward-facing supply chain applications that improve processes within their own four wall. But these application initiatives won't enable firms to establish dynamic trading relationships or facilitate cross-enterprise supply chain interaction. Users tell us that starting next year, they will embrace new applications to support the externalization of their processes. The result? Inward-facing supply chain application spending will shift from half of all supply chain application purchases today to a mere 32 percent in 2005.

Keenan of Keenan Vision concludes by saying, Everyone got caught up in the 1000 percent growth last year. You won't see that kind of hyper growth again, but instead a steady progressive growth.

Impacting Trends

Look for what is forcing an organization to stay competitive and viable in its market and you'll discover what technology they're taking seriously today. Says Jennifer Chew, an analyst for Forrester Research, The need for companies to dynamically collaborate with each other is driving [the SCM and e-procurement] market.

Chew explains that the way members of a supply chain typically react with each other is shifting. For example, she says, Outsourcing non-core competencies like logistics or benefits administration will go beyond cost efficiencies, and firms like GE and IBM will give partners a seat at the planning table and provide incentives to their partners to find better solutions. Also, we can expect Japanese firms to lead the way in moving to performance-based supplier relationships with their strong cultural tendency towards collaboration.

Keenan gives his take on all this, too. Frictionless commerce is a realistic vision, but we won't get there all at once. In the future, exchanges and information depots will truly be a part of economic environment.

On the social impact scale, specifically, people will view the Web as the place to go to work (and much of this is occurring already). People are beginning to think of the Internet as the place they go to work. It's the deconstruction of the workplace, says Keenan.

iSource Business also discovers a culture shift when talking to supply chain professionals. Practitioners are recognizing their value to the enterprise and are adjusting the way they work to suit future success and improvements in the supply chain. Much of this is a result of a mental change. Instead of fearing technology, more leaders in industry are embracing it. This approach will allow for more technological growth and create a social shift in the way professionals attack work.