E-Sourcing Vendors: Down, but Not OutBy Kim S. Nash Print
Companies selling online purchasing software have been to hell and back. Well, not quite back.
The two market leaders, Ariba and Commerce One, are bleeding tens of millions of dollars, yet vowing to be profitable sometime soon. But at least they're alive, unlike several rivals from the heyday of Internet sourcing and procurement three years ago.
At that time, Ariba and Commerce One were touting their Web-based software as the foundation for business-to-business online marketplaces. The software makers would help companies band together to purchase supplies online, in bulk. The pitch: Companies would save money by forcing suppliers to bid more keenly for their business and by making the buying process more efficient.
Everyone from farmers to airplane makers to steel companies bought into the idea. The more business-to-business (B2B) marketplaces were hyped, the more software Ariba and Commerce One sold.
Then reality struck. Internet companies, including dozens of marketplaces, withered without real business plans. "B2B" became a four-letter word and Ariba and Commerce One lost a huge customer base. They have had to reposition themselves and back away from the B2B moniker.
Today they sell largely the same software. But they have become suppliers of enterprise applications. That is, instead of looking to newfangled online exchanges for most of their sales, they now also target big companies with big procurement needs, such as Pillsbury, Schlumberger and Textron.
All companies, no matter the industry, have to buy routine goods to functionpens, copier toner, thumbtacks. E-sourcing and e-procurement software is designed to put the process of purchasing those mundane items online. Allentown, Pa.-based Air Products and Chemicals, for example, saves $5 million to $6 million per year by using Ariba software to communicate directly with office supply company Boise Cascade. Less paper, less mail, less bureaucracy, less time.
The repositioning by Ariba and Commerce One is playing well enough to prompt Manugistics, a longtime supply chain management vendor with some challenges of its own, to enter the market for Web-based sourcing and procurement software. Manugistics, Ariba and Commerce One may come at it from different perspectives, but e-procurement and e-sourcing "is where they intersect," says Cathy Spencer, a Gartner Inc. analyst.
Smaller rivals include Clarus (2001 sales of $17 million, loss of $120 million) and FreeMarkets (2001 sales of $148 million, loss of $295 million).
National Gypsum, a $1.5 billion wallboard manufacturer, put in an Ariba-based e-procurement system a year ago and so far has hooked up 200 suppliers. It does half of all corporate purchasing that way, says Joanne Eggert, senior manager of supply chain technology at National Gypsum. She declines to discuss return on investment, but insists payback will come. "You get all the low-hanging fruit in the first year," Eggert says. "Now we're in the middle part of the project."
Projects can cost $500,000 to $5 million, depending on the number of software modules and amount of consulting help used, says Ernest Gabbard, procurement director at Allegheny Technologies. The $2.1 billion metals company is negotiating with e-procurement vendors for a project planned for this year.
One obstacle to getting e-sourcing and e-procurement software to work is getting supplierscompanies that sell the office chairs and memo padsto provide data about each transaction in the right formats, and to conform to the processes required by the software, says Albert Pang, an analyst at International Data Corp. The software packages can be customized, but it's quicker and simpler not to modify them. "All these things have complicated the implementation cycle," Pang says.
Ariba customers shouldn't expect much implementation help from the software maker; Ariba relies on third parties, such as Electronic Data Systems, for that. Commerce One has a larger services division, which mainly focuses on helping business-to-business exchanges get going. But it, too, relies on consulting firms to provide most integration services to customers.
Manugistics, on the other hand, says selling services is a key part of its business, and has about 400 of its own people in an internal consulting unit.
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