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September 13, 1999

Online Procurement Takes Off

Vendors are vying for a piece of the market, but some consolidation will take place

By Ann Freestone and Clinton Wilder

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nline procurement systems promise to streamline operations, save time, and cut costs for businesses drowning in the swamp of traditional order processing. And while vendors of business-to-business buying software--not- ably Ariba, Commerce One, and Intelisys Electronic Commerce, which all debuted three years ago--are aggressively signing up new customers, it's still a young market with plenty of issues to resolve and new competitors emerging daily.

More than a dozen vendors have staked a claim in the business-to-business online procurement software market, but that number figures to shrink. "There has been some consolidation in the industry already, and we expect further shakeout," says Tim Minahan, senior E-commerce analyst at Aberdeen Group. "Make no mistake, the market for Internet procurement automation is still in its nascent stage."

Perhaps the biggest factor in the market over the next 12 months will be initiatives by traditional enterprise resource planning software vendors Oracle, PeopleSoft and SAP. All have plenty of experience automating procurement, but they have historically focused on direct materials--the goods and raw materials that companies buy that go into the products they manufacture. In contrast, most procurement over the Internet focuses on indirect materials, also known as non-production goods or maintenance, repair, and operations--everything else that companies buy. These items range from paper clips to machine tools to highly sophisticated technical services. Vendors of Internet procurement software have focused on this area precisely because it was overlooked by the ERP companies. Also moving into this arena are midmarket providers such as Clarus, Concur Technologies, and Trilogy Software, with "lite" or lower-cost products.

Oracle, SAP, and PeopleSoft have all unveiled online procurement applications or the intention to introduce such products. It's not always an either/or proposition, however; there's plenty of "coopetition" going on. For example, PeopleSoft entered the market by essentially reselling Commerce One's BuySite software with its own eProcurement label. Ear-lier this month, it unveiled its first two customers for the application, Pepsi-Cola General Bottlers and Duke Energy Corp. Commerce One also recently signed a marketing deal with Compaq, and both SAP and PeopleSoft are investors in Commerce One. Ariba has strategic alliances with PeopleSoft, Oracle, and J.D. Edwards, among others, and Intelisys has one with Oracle.

Ariba and Commerce One each tendered initial public offerings this summer; each also reported losses for 1998. Intelisys is privately held and half-owned by Chase Manhattan Bank. Nevertheless, it's a hot market, and growth projections for procurement products and services are strong. Forrester Research projects the market will grow to $900 million by 2003.

Product offerings are evolving, too. No longer is it enough to automate the process; marketplaces that preselect suppliers and maintain catalog databases for buyers are in demand. Ariba--ranked as the current market leader with 42.2% of the $24.92 million market, according to Dataquest--offers a two-tiered solution. Its Operating Resource Management System (ORMS) provides a multisupplier online catalog that automates the procurement cycle from a customer's intranet. Ariba.com Network, launched in March, is an online business-to-business E-commerce marketplace where suppliers offer goods and services, and buyers can shop and conduct reverse auctioning, asking suppliers to bid on products they want to buy.

Commerce One and Intelisys also recently unveiled their marketplace portals. This year, Commerce One--ranked second by Dataquest, with 6.5% of the market--adopted a channel-partner strategy because its goal is to get buyers and suppliers to use its BuySite software or MarketSite trading portal, whether Commerce One makes the sale directly or not.

Intelisys has 3.6% of the market, according to Dataquest senior analyst Leah Knight. "Ariba is by far No. 1 in market share," says Knight. "They have market mindshare. Their vision is sound, they have a strong management team, stress advisory councils and focus groups, and are customer-minded."

Fueling all this interest is the lure of streamlined processes and cost savings. By the time a purchase order travels through a paper maze of approvals to the purchasing department, the administrative costs typically run $40 to $150, possibly exceeding the cost of the product itself. Gartner Group says potential savings of 15% off supplier costs are possible. Beyond reducing administrative costs, Bruce Temkin, a senior analyst at Forrester, also sees companies getting better control over maverick buyers and getting better service from suppliers.

At the same time, analysts warn users to shop cautiously: operating resource-management systems are still in their infancy, and a lot of hidden implementation costs are lurking around the corner.

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