Over the last few decades business enterprises have invested billions in IT
systems – including computers and networking equipment, software and services – in order to chase after productivity gains, cost savings and competitive advantage.

Beginning in the mainframe computer era, most of this investment has been directed towards automating internal processes, such as payroll, accounting, finance, human resources and manufacturing. During the 1990s this led to the widespread deployment among Global 2000 companies of highly complex software packages, called Enterprise Resource Planning (ERP) suites, developed by companies like SAP and Oracle, which tied many of these ‘back-office’ functions together. Meanwhile, other software companies like Siebel Systems have focused on so-called ‘front-office’ systems, developing software packages that made it easier to manage corporate sales and marketing activities and, perhaps most importantly, relationships with customers.

At the same time the explosive growth of the commercial Internet and Internet-based standards created a global, ubiquitous and cost-effective base for businesses to communicate with each other, and conduct business-to-business (B2B) e-commerce.
In essence, B2B e-commerce, or electronic trading, represents an attempt to automate the last part of the enterprise: the purchasing and supply of the goods and services that are consumed either directly or indirectly during the production process.

The development of EDI
Early attempts to streamline procurement processes and cut the costs, errors and wastage involved in paper-based processes led to the development of Electronic Data Interchange (EDI) systems, mostly organized like hub-and-spoke networks around big purchasers like the automotive giants. But EDI systems were based on proprietary technology and networks, and their expense and complexity precluded many smaller suppliers from taking part. The Internet changed all that – suddenly the e-commerce market was open to any company with a PC and a modem link.
Among the first companies to recognize the potential of B2B e-commerce were specialist software suppliers – including Ariba, Commerce One and FreeMarkets – which began selling dedicated e-commerce packages, organizing online exchanges and, in the case of FreeMarkets, reverse auctions for their business customers in the late 1990s.
Other companies, such as i2 and Manugistics, focused on making the supply chain more manageable and efficient. Meanwhile another group of specialists emerged to help suppliers put their catalogs online and provide the software and systems that would enable them to respond automatically to Requests for Quotations (RFQs) and other electronic inquiries from potential customers.

The hype around B2B e-commerce

In a landmark report published in 1998, Forrester Research predicted that US Internet-based B2B e-commerce would explode over the next few years, and increase from just $43 billon in 1998 to $1,300 billon by the end of 2003. In the wake of that report, industry analysts began tripping over each other to publish ever more inflated predictions about the size of the B2B market.

When business-to-consumer (B2C) commerce began to turn sour early last year, many analysts redoubled their enthusiasm for B2B models – especially the online exchanges – and seemed to overlook many of the real obstacles that have bedeviled some of the early public online markets and led to predictions that many will never get off the ground, or will struggle with a chronic lack of liquidity. That said, there is no doubt that the potential market for e-procurement systems of all types is huge, and the cost savings look particularly attractive, especially now that the U.S. economy has slowed, and traditional businesses ranging from auto makers to electronics companies are looking more closely again at their internal operations.

Most companies undertake two main types of purchasing or procurement. On a day-to-day basis they make routine, non-production purchases of products that do not directly contribute to the production process. These are called maintenance, repair and operating (MRO) purchases, or indirect supplies and services, and the potential savings are enormous.
The bottom line with purchasing.

Traditional purchasing is notoriously inefficient and costly. Most corporations spend a far higher percentage of their total revenues on operating resources like computers, office supplies and support services, than they do on the raw material and components that they actually use in the production of goods or services. Some estimates suggest that about 60% of global purchasing expenditures are spent on high-volume, low-dollar MRO purchases.

In the U.S., the National Association of Purchasing Management has put the average cost associated with generating a purchase order at $150. If that figure can be cut by 50% – a not unrealistic target – the savings for a large company issuing tens of thousands of purchase orders a year can be huge. The first generation of Internet-based procurement automation software addressed these inefficiencies by putting purchasing software on the desktops of front-line employees while maintaining the employer’s special trading agreements, preferred suppliers and business rules. Similarly, software and systems designed to facilitate the electronic procurement of direct materials, optimize supply chains and enable suppliers and buyers to work more closely together promise significant savings as well as faster time to market and greater flexibility.

User research findings
But while the advantages of such systems may seem obvious, recent studies suggest that many companies have yet to fully embrace the B2B concept. For example, the results of a study among Fortune 500 companies published in November by the US-based Hurwitz Group revealed that less than one third of these businesses order strategic goods from online suppliers and that many have no idea how well their electronic procurement systems have performed. The study also found that two thirds of those companies studied are ordering less than half of their indirect goods online.
“The majority of those responding to the study did not know the actual number of purchases their company made from online suppliers,” said Fern Halper, VP of e-Business Strategies at the Boston-based consulting and research company. “Despite the promise of tremendous benefits from e-Procurement – including perceived savings of up to 50% in purchasing costs – most companies are not measuring these anticipated benefits.” So why aren’t companies racing to take advantage of B2B e-commerce? Many companies complained that maintaining current price and cost information for indirect goods and services was too difficult.

As the Hurwitz report also noted, widespread adoption of e-procurement systems is hampered by lack of executive buy-in; technical challenges related to implementation and lack of support from e-procurement vendors to get suppliers online. This is an issue that some of the market leaders have begun to address by acquiring supply-side software specialists andcontent management companies.

The obstacles to market growth
The problem with many early e-procurement systems has been that they required buyers and suppliers to dedicate significant effort and resources to managing catalog content and maintaining multiple communications channels. The same issues have held back the development of the online exchanges and electronic marketplaces – many of which were announced in a flurry by big-name purchasers and consortiums early last year. Since then, many have been quietly abandoned or scaled back, and those that have begun operations have quickly discovered the importance of ensuring sufficient supplier ‘liquidity’ if they are to survive. Most analysts are now predicting a wave of consolidation among the public exchanges over the next 18 months.

Big enterprise customers also complain that most e-procurement systems lack support for complex procurement processes, including contract management and negotiation – issues that market leaders like i2 and a number of small, mostly privately held, software startups are now beginning to address.

Achieving end-to-end supply chain management is another significant challenge. “Companies may work with thousands of suppliers, but in many cases, fewer than 100 suppliers were linked to their e-Procurement system,” said Bill Eisele, another Hurwitz Group e-Business analyst. “Let’s face it, there are some major supplier-enablement issues still out there. Companies investing in e-Procurement systems should make certain that their chosen vendor has a proven customer service record and can guarantee supplier access.”

Will the market ever grow?
What emerges from studies like that conducted by Hurwitz is that the B2B e-commerce market is still in its infancy. After all, Commerce One and Ariba only released their first products in 1997. Like other market leaders, they are now locked in a race to add functionality to their e-commerce suites in an attempt to address their customers’ concerns and address larger segments of the B2B marketplace.

There is, however, little doubt that the market is maturing rapidly and that after being neglected for many years, the purchasing function is increasingly viewed as strategic in big corporations. Any company that fails to establish its own e-procurement systems risks finding itself at a major disadvantage in years to come.