META Trend: Indirect (commodity and MRO) and direct procurement providers (applications and marketplaces) will add services (asset management, review/approval, resource scheduling, supplier/component rationalization, analytics, etc.) but focus tactically through 2000, improving integration by 2001. By 2001/02, auctions and dynamic catalogs will be commonplace, along with additional new/used product services (finance, logistics, assessment, etc.). By 2003, marketplace transaction revenues will be 10x software license revenues.
As Global 2000 (G2000) organizations increasingly advance their electronic business solutions, the majority are either considering or have implemented buy-side (i.e., e-procurement) electronic commerce (EC) initiatives. META Groupnotes e-business solution vendors, consultants, and systems integrators (SIs) looking to assist organizations with their e-procurement projects have recently begun to use the term "strategic sourcing" in association with marketing, promotional, and product/service description materials. While this represents a logical evolution of the buy-side EC market, we find on further investigation, many are incorrectly using strategic sourcing as a synonym of e-procurement, creating considerable fear, uncertainty, and doubt within the market.
E-procurement solutions, focusing on the improvement of purchasing processes, have been increasingly addressed by vendors (e.g., Ariba Inc., Commerce One Inc., Clarus Products International, L.L.C., Remedy Corp., Metiom Inc.) since the late 1990s. Solutions have evolved from simple catalog access tools to encompass the requisition-to-order process, primarily focusing on indirect (i.e., not components of finished goods) commodity (i.e., low degree of uncertainty) goods (e.g., office supplies, toilet paper). The benefits of automating this process have been well documented (see sidebar E-Procurement Benefits), and the solutions will continue to mature to include inbound logistics, inventory systems integration, reconciliation, payment, and more advanced analytical capabilities (2002).
Prior to requisitioning, however, organizations must determine what specific products/services they need to procure, from which supplier(s), for what price, etc. - the strategic sourcing of goods and services. While a natural predecessor to e-procurement, the automation of sourcing processes is complex, and will be commonly integrated with e-procurement solutions by 2004. Solutions, while offered as incremental evolutions of traditional e-procurement solutions, will more typically be created from best-of-breed components from various arenas:
- Asset management (e.g., Peregrine Systems Inc., Remedy)
- Payment (e.g., Visa International, American Express Company, Bank of America Corp.)
- Invoicing/bill presentment (e.g., BlueGill - now CheckFree Corp.)
- Industry Net markets (e.g., Pantellos Group, Enporion Inc. for Utilities)
E-Procurement Benefits In a recent survey concerning e-procurement, META Group found that organizations across the annual revenue spectrum received or anticipated benefits from e-procurement solutions in three distinct categories:
- Correct buying: Seventy-two percent indicated improvements in purchasing the correct product/service from the correct supplier, at the correct price, at the correct time, and with the correct attributes
- Cheaper buying: Fifty-eight percent indicated a reduction in the resources (i.e., time, capital, personnel) consumed in processing/approving requisitions
- Working capital reduction: Seventy-three percent indicated the elimination of excess inventories or procurement from existing stocks
But we expect larger e-procurement (e.g., Ariba, Commerce One) vendors to pursue increasing partnerships/acquisitions across these solution markets as they seek to expand their current offerings beyond current configurations. For G2000 user organizations, strategic sourcing will represent a significant challenge on both technical and operational/tactical fronts. User organizations will have to wrestle with a range of issues:
- Understanding suppliers
- Understanding spending
- Understanding benefits and issues associated with categories of spending
- Lots of analytics
- Supplier and contract management
- Component management within manufacturing environments
- Determination of what supply categories are commodities for a particular organization (e.g., flour, toilet paper, pens)
The anticipated need for such solutions and the associated flurry of end-user organization strategic sourcing solution efforts will increasingly attract new market entrants with new (or threatened) offerings (e.g., B2eMarkets Inc., META Group's joint venture with Ajunto Inc.). While initially associated with more basic indirect commodity e-procurement solutions, they will evolve to encompass the sourcing of more complex and uncertain products (e.g., configurable products, collaborative products, engineered products, and services [generally]).
The impacts of improving sourcing processes will greatly outshine those generated by indirect commodity e-procurement solutions (i.e., moving from simple buy-side EC toward holistic commerce chain management [CCM]). Concomitantly, the costs of the more complete solutions will multiply as each new component is added, driving demand for SI and consultancy assistance, as no one vendor will be poised (realistically) to offer a "complete" solution (through 2005), and the addition of each new component or system will accelerate the complexity and scope of the project(s).
This will also represent a strategy augmentation for e-business vendors (e.g., Ariba, IBM Corp., application service providers, in general) that have publicly identified penetration of the mid-tier (e.g., annual revenues of $100M-$1B) as an important next step. As a counter to the goals of e-business market domination of the large players, many newer vendors (or new to the e-procurement world) are looking to encapsulate the successes of the Aribas and Commerce Ones with solutions/services that will complete (or at least augment) the heretofore incomplete (i.e., catalog-to-order) e-procurement offerings. This will represent increased competition with the buy-side EC market, as well as increase the complexities of vendor/service-provider selection.
While the large IT vendor that manages to successfully service the mid-tier market will reap considerable fame and fortune (so far, none have), this will further enable G2000 companies to more completely integrate their e-business solutions with smaller trading partners (bringing them to a more comprehensive CCM solution). G2000 user organizations will be well served to examine current (and typically) rudimentary e-business solutions for extension opportunities (as opposed to solely investing in new discrete initiative) as a means to mitigate the risks associated with both business process re-engineering and commerce chain management efforts.
Business Impact: By improving supplier management and streamlining buy-side processes, the combination of sourcing and procurement solutions will enable companies to reduce costs.
Bottom Line: E-procurement solutions (as currently offered/implemented) do not address the complete catalog-to-payment cycle, and (despite marketing hype) do not at all address the sourcing (or "strategic sourcing") processes. In addition to more strategic commerce chain management plans, Global 2000 user organizations should continue to expand/extend their e-procurement solutions from an internal perspective to maximize benefits and minimize incremental risks.
|Copyright )2000 META Group Inc. ELECTRONIC BUSINESS STRATEGIES is published by META Group Inc., 208 Harbor Drive, P.O. Box 1200061, Stamford, CT 06912-0061. Web: http://www.metagroup.com. Telephone: (203) 973-6700. Fax: (203) 359-8066. This publication may not be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without prior written permission. All rights reserved. Reprints are available.
EBS 1 December 2000.1015