The Story So Far

It is only necessary to go back a few years to enter into pre-e-procurement history. Prior to 1997, electronic exchange of information concerning purchasing was pretty much limited to either faxed purchase orders, or for a select group of large and progressive companies, to Electronic Data Interchange (EDI). In fact, for most people in business, EDI is still synonymous with electronic procurement. It is true that large companies have been using EDI with their major trading partners for almost 25 years now, but these EDI systems were based on leased lines, were expensive to establish and to use, and were hindered by a lack of agreed-upon standards—most of which were designed for, and therefore proprietary to, certain industries. What is more, it has always been too complicated and too expensive for smaller enterprises to set up a dedicated EDI connection (the cost averages between $25,000 and $40,000), and as the global economy moved into its current phase, it became apparent that EDI would be far too complex and cumbersome to exploit the extended enterprise and global trading communities that were emerging.

E-procurement really began in the late 1990s when several start-up software companies, led particularly by Ariba and Commerce One, began to develop a suite of applications that allowed vendors to create electronic catalogs. It began inauspiciously enough. Most of those original software providers, still unaware of the impending explosive growth of the Internet, created products that, although capable of transmitting over the Internet, would still reside within the firewalls of the buyer company, and were for the most part focused on ORM and MRO types of vendor products. Because vendors seldom had either the skills or IT capacity internally to create or maintain those electronic catalogs, these software suites were primarily designed from a “buy-side” point of view, and responsibility for content management, daily maintenance, and troubleshooting, all fell to the buyer’s staff.

However, loading and managing large, and often badly organized, supplier parts information in electronic catalogs turned out to be much more time consuming and difficult than the buyers had originally bargained for. It suddenly became the responsibility of the buyer company’s staff to deal with the complexities of aggregating the content of multiple vendors’ catalogs, revising and cross-matching prices against discounted service agreements, and constantly updating and editing product changes.

Moreover, not only were there no agreed-upon standards for content management and presentation, but there were no agreed-upon standards for communicating over the fast-growing Internet. Initial attempts to shift EDI to the Internet had proved equally difficult, and even by 1998, a study by the Aberdeen Group concluded that not a single organization they surveyed had been able to connect more than a handful—10 to 15 suppliers—electronically to their systems.^[1]

It soon became apparent that this original buyer-managed model would never be successful, because the burden on the buyer’s staff was simply too great. Realizing this, several of the e-procurement software companies stepped forward and offered to take on the responsibilities for maintaining the catalogs on behalf of the buyers—essentially providing an outsourcing service on behalf of many vendors and large buyers. They would customize and maintain the catalogs, coordinate communication methods, and then either update the buyer’s server on a regular basis via downloads through the Internet, or alternatively, would simply host the catalogs on their own servers, which they would then share with buyers through a Web site portal. They therefore became the intermediaries between the buyer hub and the vendor spokes.

It didn’t take the industry long to realize that they were on to a good thing here, and several companies soon began to offer complete outsourcing services, which included developing and maintaining registries of preferred suppliers, and even going so far as to provide contractual and legal services, performance management tools, and logistics support.

This shift toward third-party hosting, of course, was the spark that ignited the explosive and volatile expansion of the entire e-procurement industry. In a short period of time—less than two years—a dramatic change occurred. Instead of focusing on internally held software that buyers had to maintain—or pay to have maintained—buyers and vendors could be provided the same service over the Internet through portals on a subscription basis. Moreover, with the responsibility for catalog management no longer sponsored and controlled by a single buyer, it was a logical next step to make those catalogs available on a similar outsourced basis to many buyers who had similar supplier needs.

This brought about two changes that would alter the e-procurement industry forever. The first was that the one-to-many model, which had been the basis for all e-procurement systems designs, suddenly shifted into a many-to-many mode. The idea of a hub-spoke relationship in which a single organization would arrange to electronically procure goods from a handful of preferred suppliers (essentially the EDI model moved to the Internet) was suddenly rendered obsolete. Although it still proved attractive to a number of large companies with specific supplier needs, for the most part, the proprietary company extranet—at least as far as e-procurement was concerned—had suddenly and unexpectedly become an anachronism.

The second change—which went hand-in-hand with the realization that a hosted, many-to-many model was infinitely more logical and profitable than a one-to-many model—was the remarkable explosion in electronic marketplaces, online auctions, industry portals, and trading hubs that came about over the span of a few months. These specialist e-markets and third-party trading hubs blossomed in virtually every industry vertical—automotive, energy, petrochemical, steel—as well as in many horizontal markets, such as office supplies and travel services. There are today third-party providers that host virtual shopping malls, online trading exchanges with various types of online auctions, and innumerable types of hosted services—Application Service Providers (ASPs)—that furnish full Web-based e-procurement and e-fulfillment services. Each of these providers serves as a central electronic site that brings suppliers, distributors, and buyers together over the Internet, often boasting a bewildering array of services, including dynamic pricing, Customer Relationship Management (CRM), arbitration and negotiations, and full e-fulfillment.

Added to the complexity of this ever-changing marketplace are the many new and powerful parties that have plunged into the morass. These include the original e-procurement software houses, various newcomers, an assortment of Internet service providers, the major ERP vendors, the large and influential supply chain management software suites, catalog maintenance providers, and a broad array of technical support organizations that provide translation, interface, and interoperability services. There are also—for many of the vertical exchanges—large and financially powerful industry representatives who are busy aligning with various support partners in multibillion dollar collaborative exchanges. Apart from millions in venture capital funding, these collaborative efforts are often given additional financial backing by large international banking concerns.

To appreciate the complexity and volatility of this marketplace—and also the potential levels of profit up for grabs—it is only necessary to look at the number and types of organizations that are rushing to take part.