What a Difference Seven Years Make: The Shape of e-Procurement Today

By Eric T. Smith, Managing Director and Sam Cholapurath, Senior Consultant

IAround seven years ago, the corporate world was giddy with the idea of “electronifying” its purchasing processes via the new web-based procurement tools and e-marketplaces that were seemingly ubiquitous at the time.  The promise of these e-procurement tools was a combination of cheaper procurement, better payment terms and cheaper processing costs.  At the time, Gartner estimated that e-marketplaces would transact $7.3 trillion of global trade by 2007. 

As we know, it ended in tears as the “dot-com bubble” burst and e-commerce spending shrank dramatically.  Between 2000 and 2005, more than 1,000 e-marketplaces sprang up. Today there are about three dozen.  The fad had passed and corporations had little to show for it – or so it seemed.

Today, out from under the spotlight of speculation and hype, e-commerce and e-procurement have matured quietly and are delivering real value – both in terms of the process of procurement as well as the unit prices for goods and services bought.  Led by providers like Ariba and Perfect Commerce, enterprises have learned lessons of early implementations and are forging ahead to gain the long-promised benefits.

During a recent consulting engagement, we watched as a governmental sponsor of a new e-marketplace sold the value proposition of joining its marketplace to a wide-ranging set of vendors.  We expected to hear the old barriers and excuses of the past, but these buyers and vendors struck a new tone.  It appears that some of the impediments to a successful e-procurement implementation have been all but eliminated.

Below we recall the top reasons from the year 2000 that companies did not adopt e-procurement, and then assess today’s situation:

1. Then:  “The e-procurement tool only affects the purchasing group, but doesn’t connect the finance department to payment.”   Years ago, e-procurement systems stopped at the invoice.  The accounts payable department of the buyer still had to make manual payments and many times had to re-key purchase order and invoice data into the financial system or ERP.  Since then, the leading providers have made the right investments to complete this part of the value proposition and to make e-procurement friendly to the finance department. 
   Now:  “Procure-to-Pay” is working for enterprises, allowing them to knit together via workflow tools the processing of a purchase  from purchase order to the payment of an invoice.
2. Then:  “There are no standard data formats which simplify (and make cheaper) the flow of data between my company and our trading partners”.  In 2000, many trading partners used proprietary data formats.  Many times, the data formats were dictated by the more powerful partner, forcing the less powerful of any trading duo to absorb a high technology cost to implement. 
   Now:  Today there is XML, a well accepted and flexible way of exchanging business data between trading partners.  In the early 2000’s, this standard was only beginning to gain acceptance, mostly by large sophisticated companies with large IT budgets.  Today, it is a standard practice among companies of all sizes and sophistication levels.
3. Then:  “E-procurement is readily adopted by my larger, more sophisticated suppliers, but my smaller ones are resistant.”  Larger vendors had the financial and technological muscle to implement an e-procurement program with their customers, but smaller ones lacked the resources and skills to get it done. 
   Now:  Providers such as Ariba and Perfect Commerce now have robust options for vendors of all sizes and levels of sophistication.  Ranging from tight server-to-server integrations through secure file transfers to email uploads, the choices available to the vendors allow them to scale their investment according to their technological savvy, their business benefit and their liquidity.
4. Then:  “Security on the internet is not ‘bullet-proof’ enough for corporate transactions.”  Remember these discussions?  At some point, nearly all e-commerce initiatives were brought to a stand-still by this concern.  Armies of techies and consultants argued and analyzed.  Even then, though, the answer generally was that security was workable. 
   Now:  Today, it’s not even a discussion item.   Recently, I sat in a room of 10 suppliers – large and small -- being asked to participate in an e-marketplace and there was not even a hint of security being an issue.  Both the security technology and the acceptance of its robustness have moved on.
5. Then:  “The value proposition is clear for a company as the buyer, but it isn’t for our suppliers.”  In those days, this was due to a lack of acceptance of the value proposition to the buyer.  Further, the value proposition was seen as one merely of back-office processing efficiencies (e.g., processing invoices and purchase orders more efficiently by the vendor).
   Now:  Today, as the procure-to-pay spectrum has taken shape, other value besides cheaper document processing accrues to the vendor.  For example, many marketplaces and large buyers are eliminating purchase card purchases in the e-procurement system.  This can amount to 2-3% of total revenue for the vendor, and can make the business case for an e-procurement system.

The dot-com bust saw the demise of hundreds of e-marketplaces.  Because the promised volume of purchasing activity was never achieved by these electronic marketplaces of many buyers and many sellers, they collapsed under their own weight.  In the corporate world, large corporate buyers made multi-million dollar investments in e-procurement only to see their business walk out the door along with the vendors who refused to participate.

The rumors of the death of e-procurement were greatly exaggerated.  E-marketplaces are making a resurgence, especially in the public sector where a state or local government can act as the strong single sponsor of a marketplace of government agencies and their suppliers.  The Commonwealth of Virginia and the provincial government of Ontario’s educational agencies are shining examples:  the former an example of an established marketplace and the latter – called the Ontario Educational Collaborative Marketplace – a new, promising e-marketplace to be officially launched later this year.

Quietly and without the hype of seven years ago, e-procurement has become mainstream.

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