The Analyst Corner: Procurement

By Julie Murphree

The procurement and sourcing software market has cooled some over the past few years, but it still commands attention from the analyst community and practitioners due to lots of continued innovation.

 The headline could read, “Procurement and Sourcing Software Market Help Save the IT Application Market.” Well, sort of.

A mid-summer release of AMR Research’s annual "Market Analytix Survey" reported that after three years of lean application investment, software spending will rebound to 5 percent this year and 6 percent in 2005. Boston-based AMR Research also gave its traditional five-year prediction in the Analytix Survey, forecasting that technology executives will spend an additional $14 billion on enterprise applications through 2008 with total technology application investment reaching $60 billion globally.

But while these single-digit gains cast a glimmer of hope in the enterprise-wide application market, continued cautious spending and smaller deals will keep growth constrained. The Wall Street Journal (July 6, 2004) described a recent study by Bain & Co. that found nearly two-thirds of publicly traded software companies lose money. The big players with more than $1 billion in revenue are the exception. This includes SAP, which announced a14 percent increase in second-quarter net income on a solid gain in U.S. market share. However, the July 6 WSJ article also provided a long list of software companies pre-announcing disappointing second quarter results.

So while information technology (IT) research firms may be predicting growth in the various software application markets, software companies’ recent quarterly reports underscore a tenuous environment. But not to despair, there’s procurement and sourcing.

In the "Market Analytix Survey’s" breakout of IT areas the procurement and sourcing application area, while still in the single-digit range, takes the lead in predicted growth for the 2003-2008 period with 8 percent (enterprise resource planning (ERP), customer relationship management (CRM) and human capital management are at 6 percent; supply chain management (SCM) and product lifecycle management (PLM) are at 5 percent). The survey reported that “demand for services such as procurement business process outsourcing (BPO), low-cost country sourcing, compliance management, supplier management, analytics, benchmarking, and data management services will help prime the pump for 8 percent market growth [in this area] during 2003-2008.”

AMR’s 2004 Market Analytix Survey reports the historical data over the past several years: “After hitting rock bottom in 2002, the procurement and sourcing market eked out 2 percent growth in 2003 because of continued buoying by the top three ERP vendors and from professional services revenue demanded by results-oriented procurement managers.”

Pierre Mitchell, vice president research with AMR Research, suggests that the procurement and sourcing market has been more creative at expanding services and other offerings to gain the predicted 8 percent growth, versus the others software markets that are running at 5 and 6 percent. “Business process outsourcing, for example, is becoming an extension of the procurement function,” he says. “It’s certainly not replacing the traditional procurement function but augmenting it. Function experts are not just giving us fish, but they are showing us how to fish. It’s ultimately about results.”

Mitchell further suggests that as supply markets become more challenging, players must extend their offerings. “You can really start to see more efficient processes where technology companies become true solutions providers,” he comments.

Last year, Aberdeen Group's Tim Minahan, vice president of supply chain research, predicted that procurement BPO and intense focus on spending categories, particularly services, were the two biggest trends in procurement.

“Last year’s predictions have come to fruition and are still valid,” says Minahan. “That said, another major shift we’ve seen in supply management [procurement and sourcing] has been the shift from savings identification to savings realization. If you look at the first phase of online procurement and sourcing, it was the equivalent of corporate liposuction. It was all about driving process efficiencies and cutting the “fat” from supply markets — primarily from suppliers’ margins.”

He goes on to explain that two key factors have become clear. “First, negotiated savings are not necessarily real savings. In fact, our research has found that 60 percent of e-sourcing users have not been able to fully implement the savings they have negotiated online. To ensure savings capture, enterprises must have codified procedures and systems to communicate negotiated terms to all relevant stakeholders and to ensure optimal usage and compliance with supply agreements over time.”

“Secondly,” says Minahan, “the double-digit savings of early e-sourcing implementations are not sustainable. You can’t consistently drive double-digit price reductions year over year without putting your suppliers out of business. Now, with supply market constraints and inflation resurfacing, buyers are no longer in the driver's seat. Those who don’t react quickly to adjust their sourcing and supply management strategies risk supply shortages as suppliers dedicate capacity and inventory to preferred customers.”

Minahan advises that key strategies include improving spending analysis capabilities, improving understanding of supplier cost structures, and adopting more flexible/expressive negotiation formats to allow suppliers to differentiate their offerings on more than just bundle and unbundled bids. He also says that companies should involve suppliers earlier in the design process and focus on the economic value engineering (EVA) — i.e., collaborating with suppliers to remove non-value added specifications, processes, and tasks.

Procurement Players in the Market Today

In discussions with AMR’s Mitchell, he reports a continued “massive shelf-ware” environment with SAP, Oracle and PeopleSoft. In other words, the procurement and sourcing modules sold in the major ERP-players’ packages languish. “The modules tend to be part of an overall upgrade since they’re profitable and salespeople like selling them, but once installed they are not extensively used,” says Mitchell.”

This is not necessarily a negative, and such investing with the ERP-players helps increase the procurement and sourcing market-share numbers. In addition, "The AMR Research Market Analytics Report" states, “[Chief information officers (CIOs)] are keenly interested in minimizing IT complexity, and one key strategy for this is to use a major ERP vendor for not just core ERP, but for strategic extension applications such as supply chain management and supplier relationship management (SRM). ERP vendors, in turn, are willing to discount their SRM modules in order to harm their best-of-breed competitors, overcome functionality shortcomings, and win broad application suite deals.”

SAP, Oracle and PeopleSoft increased their license revenue market share from 24 percent in 2002 to 35 percent in 2003, according to the report.

Mitchell indicates that the head of procurement has a divergent goal compared to the CIO’s desire for IT simplicity. As a result, the chief procurement officer (CPO) or vice president of procurement is mainly concerned with “delivering the ever-increasing savings goals promised to the CEO/chief financial officer (CFO) and is not about to let a lack of software functionality or professional services support from an incumbent vendor slow up the speed-to-savings.”

“For those companies with no plans for an ERP infrastructure any time soon, those more advanced are using e-sourcing suites, while slower adopters are using e-sourcing services and simpler applications (e.g., hosted RFx tools) that can be served up to hundreds of diverse business users to run competitive bidding events — from reverse auctions to basic “three bids and buy” request for quote (RFQ) support,” says Mitchell.

As a result, best-of-breed players have plenty of room (and hopefully time) to continue to make a significant impact on the market.

According to AMR Research, because of the need for more advanced, specialized technologies and services, certain best-of-breed players can shine in the market. For example, services procurement providers like Elance and IQNavigator, and contract management vendors such as diCarta, Determine Software, I-many and Nextance are enjoying some short-term success because of the weak support of these areas by the ERP leaders. CPOs and CIOs do agree on the need for improving data quality — particularly master data — to improve business processes and decision support capabilities. Ariba, i2, SAS Institute and Verticalnet have strong capabilities with master data, while niche provider Zycus makes this area its sole focus. SAQQARA, ePlus and Requisite Technologies continue to do solid work in content management.

Both Aberdeen Group and AMR Research point out how license revenues still trail services revenues. This is notable and predictable because of all the sourcing services hybrid providers, such as FreeMarkets, A.T. Kearney Procurement Solutions, Silver Oak Solutions, Tigris Consulting (now Verticalnet), ICG Commerce and Global eProcure. License revenues did post the largest gains in the most recent quarter because of the “cumulative effects that are starting to build from the ERP vendors successfully selling their products in the field,” according to AMR Research’s "Market Analytix Survey."

Everyone in the analyst community continues to say that on-demand and procurement BPO remain as “hot topics in 2004.” Most providers are claiming some type of on-demand model in their business plan. This is in reaction to the procurement customer’s demand for reasonable and affordable investment outlays in procurement and sourcing software and services. Major players in the procurement BPO space include ICG Commerce, IBM Global Services, EDS Procurement Outsourcing and Prosero (formerly FacilityPro). With the acquisition of Alliente and FreeMarkets, Ariba now offers procurement outsourcing services.

Says AMR Research’s "Market Analystix Survey," “This Wall Street reward for predictable subscription revenues has not escaped small providers like Digital Union, Intesource, Mindflow, Iasta, Ketera, Perfect Commerce, Portum and Procuri, as well as public vendors like Ariba, Epicor, ePlus and Oracle. Even with all this buzz and with the resurgence of some trading exchanges who are a channel for hosted e-procurement, e-sourcing and content management applications, AMR Research expects no major differences to the market in 2004 than what occurred in 2003. This includes sales channels where the market is still 84 percent penetrated by a direct sales channel model.”

AMR Research is advising large players with well-established channels, like Microsoft and IBM, to start pushing supplier-facing applications down-market. Plus, until group-buying capabilities get wrapped into a solution (to provide a hard return on investment (ROI) for the mid-market), the current market will continue to be dominated by a direct-sales model.

Under the merged Ariba/FreeMarkets model, procurement customers get the closest to a best-of-breed one-stop shop for the all-in-one plug-in. According to the analysts, CPOs can appreciate FreeMarkets because they often can hit hard-dollar results.

The direct procurement application segment occupies only 15 percent market share, according to AMR Research, but it is the top supplier-facing implementation area.  The two reasons for this: 1) Direct materials procurement is supported by native ERP functionality, and 2) it’s a business process that is supported by multiple markets, including direct materials SRM (e.g., SupplyWorks), Web-electronic data interchange (EDI) (GXS, INOVIS, SPS Commerce, Sterling Commerce, et. al.), supplier portal (e.g., ClearOrbit), exchanges (e.g., Quadrem, e2Open), and supply chain execution (e.g., Optum).

With procurement customers seeing the clarified need for combined services and technology, they still must reach for providers like ADR International for specialized procurement consulting to figure out how best to approach their sourcing and procurement functionality. Consulting tie-ins are increasingly gaining favor as the market gains strength.

The analyst community tells us that revenue, customers and geographic breakouts will not register any major shifts. And while still an “adolescent market,” software license will slightly trail the overall market. As mentioned earlier, much of this is due to the procurement markets’ services bias and a shift toward on-demand pricing and deployment, the emergence of procurement BPO as a channel, and because of the natural shift toward maintenance revenues after a license sale.

Finally, AMR Research predicts e-procurement (direct and indirect) will continue to remain flat, but represent a healthy 40 percent of the overall market, while e-sourcing takes the top spot at 43 percent projected market share in 2008 (most of which will continue to be services-based revenue).

While the procurement and sourcing software market may not be as “hot” as it was in 1999 and 2000, it will continue to command attention. Corporations will not find any true one-stop shops, despite the Ariba/FreeMarkets marriage.

Yes, the procurement and sourcing software space seems to have done a bit better by extending its offerings, leading the way for providers to pull up into the 8 percent revenue growth in the next five years. But to do this, providers must continue to get creative and attentive to customers and not rule out anything when it comes to meeting the market needs of the customers. As always, innovation and inventiveness leads market winners. IT application savior maybe not, but innovators, yes.

 Julie Murphree is founding editor of Supply & Demand Chain Executive. Currently, Murphree is a researcher and frequent speaker to organizations regarding supply and demand management.