New wave of integrated sourcing

Companies have saved billions of dollars by using B2B (business to business) e-procurement and e-sourcing technologies over the past four years. That is the claim of most of the many companies involved in esourcing and eprocurement, online auctions, e-marketplaces and collaborative commerce.

As always in the field of large scale IT investment, there is some debate about the magnitude of the claimed savings. Research by Benchmark Research, commissioned by spend management software supplier Commerce One, found that two thirds of ‘high performing’ companies achieved cost savings amounting to at least 10% of their procurement budget. And more than four fifths said they had achieved a measurable increase in reliability.


Procurement, sourcing and eSourcing

Procurement comprises all activities associated with a company’s acquisition of materials and services. Sourcing is a subset of procurement – its strategic context. Because it sets the stage for managing most companies’ single largest cost component (acquiring direct and indirect materials and services), sourcing warrants senior executive leadership. Successful sourcing approaches are linked to key business goals and are defined by key business relationships. And they are measured by the bottom-line benefits they bring to an organisation. Sourcing’s mission is to maximise the value of suppliers and minimise the total cost of ownership (TCO) of materials and services.

Sourcing involves the development of company wide, strategic approach to:

  • Obtaining needed materials and services.
  • Identifying and evaluating potential suppliers to meet those needs.
  • Negotiating and implementing contracts with selected suppliers.
  • Monitoring and improving ongoing supplier relationships.

    Source: Accenture


  • But a recent report from Forrester Research questioned the extent of the claimed savings. “Firms fail to achieve hoped- for cost savings due to fudged price comparisons and weak purchasing compliance”, said analyst David Metcalfe.

    Even so, there are many example of great success, and the clear implication is that, if best practice is adopted, then more companies will achieve better results. Car maker Ford, for example, says it saved $70 million buying indirect materials through e-marketplaces such as Covisint, in less than a year during 2000 and 2001.

    Similarly, materials manufacturer Owens Corning saved $7 million in less than two months in 2001 by using e-sourcing technology from PurchasePro. On average, companies can reduce spending by 10% if they use e-sourcing tools, according to consultants at sourcing specialist AT Kearney. And this can add up to a lot of money. Car maker Volkswagen, for example, spent more than $14 billion in online auctions over the past year.

    However, because online B2B has quickly matured, new savings are harder to find. Supplier reticence makes it harder to drive down prices through online auctions. Moreover, few B2B exchanges provide good enough integration to convince partners to work together online. In some cases, hard lessons about trust and pricing strategies have been learned.

    The global economic slowdown is putting even more pressure on chief procurement officers to cut costs, according to a recent report on sourcing by consultancy Accenture. B2B technology vendors, such as Ariba, Commerce One, and GXS, are trying to meet this demand by adding more application functions to their products. For example, they have added supplier and spend analysis and contract compliance features to improve the ability of their products to reduce costs.

    But integrating these products to work as a seamless process, and convincing customers they should invest in yet another piece of B2B software, is difficult, especially if suppliers do not wish to pay for the integration. That is one reason for the high level of interest in web services, the revolutionary set of standards that enable flexible and dynamic integration based on XM.

    Cheap and easy

    There are two reasons why B2B technology companies are adopting web services. First, web services technology enables software vendors to break up their product suites into their constituent applications and functions. Second, it is a cheap and easy way to integrate business partners and applications.

    The software suppliers see the ability to break their products into components as a good way to increase sales – even those that offer an integrated suite, such as SAP and PeopleSoft. These suppliers hope that cautious IT budget holders, wary of signing off on large scale technology implementations with few guarantees of success, will be more likely to buy the products if the suites are broken down into components.

    As Ravi Ghai, vice president of marketing for Moai, an e-auctions and sourcing technology company, explains: “The e-sourcing process has developed from just using online auctions, to incorporating spend analysis, supplier analysis and selection, contract management and compliance, and finally procurement and e-payment. No one technology vendor provides all this. But even if customers do want to electronically enable this whole process, they are not actually doing it. That is because they have been burnt by expensive enterprise resource planning and supply chain management technology implementations.”

    However, the open specifications and broad industry support behind web services means that customers can implement pieces of this process, such as spend analysis or online auction management, step-by-step. They also have the choice – buy each piece from a different vendor, or buy a more integrated family of products from one vendor.

    “Our aim is to componentise our software through web services. This makes it easier for us to add functionality that is not currently within our remit, such as payment applications, from third-party vendors,” says John Watton, UK marketing director for e-procurement and sourcing software vendor Ariba.

    For example, one of the biggest barriers to the adoption of B2B technology is that it is difficult to integrate and maintain product catalogues, says Tom Slaight, global head of strategic sourcing for sourcing consultants AT Kearney. Web services have a clear role here. The common XML


    Tom Slaight, AT Kearney


    based standards will not only ease integration, it also means catalogues can be stored only once, and maintained centrally by their owners, says Slaight.

    At present, although XML is often used, cataloguing products often involves moving large files around then updating several copies. Moreover, if software suppliers accept and support web services, corporate customers can implement software more flexibly.

    The integration imperative

    Integration, between businesses and within enterprises, is possibly the most important issue in Internet-based B2B (see article, Simple Services). Software suppliers say web services standards will ultimately speed integration between businesses, reduce the cost of integrating smaller partners, and improve integration between departments within larger organisations.

    Indeed, the main tenet of collaborative commerce, where business partners share real-time supply chain information, is that applications and data merge seamlessly within internal and external business processes. “Effective strategic sourcing should enable people to share ideas and work together,” explains John Rees, UK manager of Commerce One.

    The integration of B2B processes, however, has not kept pace with the adoption of esourcing and supply chain software, according to sourcing consultancy AT Kearney. Its recent study of 147 global companies, with average 2000 revenues of $9.5 billion, revealed that 96% are using e-supply management technologies. But few of these companies have applied the tools across their enterprises. This means that, on average, only 11% of their spending is addressed by these technologies.

    One reason for this is revealed in another finding. The study’s participants said their existing procurement systems were poorly integrated. They also said there were weak links to other systems such as accounts payable, and admitted that their ability to assemble and analyse information was limited. According to the report’s authors, all these problems are among the top reasons why e-supply management systems fail to meet expectations.

    “Our findings reveal that companies that use e-ordering tools to redesign the entire order-to-pay process – from front to back and all points in between – are the most successful in their efforts to create value. For most companies, however, this is more theory than reality; a disconnect exists between the front and back ends of the process,” say the reports authors.

    Integration is just as crucial outside the enterprise, when connecting to business partners. The infamous collapse of the e-marketplace industry over 2001 is evidence of this. For example, in a March 2002 study of European e-marketplaces, Forrester Research analyst David Metcalfe, found that lack of B2B integration was key to the failure of 88% of Europe’s e-markets to make profits.

    E-marketplaces such as Elemica, and e2Open, which focused on data and application integration between business partners, were cited as leaders in the study. As for the laggards, Metcalfe suggests these e-marketplaces invest in web services training and work with their technology suppliers, such as Commerce One or Ariba, to help them launch live web services to provide applications that integrate across the supply chain.

    Adoption slow

    The demand for integrated B2B data and processes across business partners and internal departments, has made web services technology critical. Web services projects should be flexible and quick to implement. And web services should solve integration problems in any size of business. In complex supply chains that involve both small and large businesses, that is vital.

    For these reasons many technology vendors in the sourcing and B2B market have embraced the concept of web services. For example, e-sourcing services and software vendor FreeMarkets says web services will enable it to use the same technology and protocols to integrate their systems with different customers.

    “The same integration techniques work regardless of whether our customers install our software behind their own firewall, install it at a third-party hosting provider, or use our application service provider (ASP) deployment model,” says Rebecca Thompson, FreeMarkets’ vice president of marketing and product management.

    Yet FreeMarkets, like the majority of B2B technology vendors including Moai, Ariba and GXS, have yet to deliver the kind of web services based products they are promising. In fact, only a handful of vendors have incorporated the technology deeply into their product suites.

    Perhaps the company most committed to web services in this sense is Commerce One. The B2B technology vendor is spending about 30% of its research and development budget, almost $40 million, to rebuild its software to work on a web services integration platform. The reason: “Our customers tell us their supply network is inflexible and unable to quickly respond to changes in their supply chain. With our new web services solutions, we directly address customer demand for an integrated supply network,” says Commerce One CEO Mark Hoffman.

    There has been some scepticism about Commerce One’s rapid transition from eprocurement software to web services evangelist. Even so, the company does supply a large number of public and private e-marketplace operators, most of which would be interested in such web services technology. And the company’s recently announced partnerships with security, business intelligence, and web services technology vendors, intended to fill in the functional gaps in its product line, show that Commerce One is at least set on the right path technically.

    Web services technology is also being incorporated in strategic sourcing technology from enterprise applications provider PeopleSoft. The software company is piloting a system that enables its Trading Partner Management product to search suppliers listed on public and private Universal Description, Discovery and Integration (UDDI) registries. UDDI is a core web services registry specification, which can be used to list any type of details for physical entities or software components. Details can include anything from physical address to technical integration interfaces.

    Both these examples are at early stages of development however. PeopleSoft’s UDDI registry, for example, is limited because most businesses listed on public UDDI registries publish only their physical contact details, such as telephone numbers and postal addresses. It will be some time before these companies are confident enough to publish their XML integration details for business partners. But only then will UDDI enable ‘plug and play’ integration.

    However, as an enabling central registry for use by close trading partners, UDDI technology is already playing a key role for PeopleSoft. The good news for corporate technology buyers is that web services adoption is mainly an issue for the technology vendor, not the customer.

    During 2003, most B2B technology companies, integrators and e-marketplaces will incorporate web services. And the open nature of web services standards means they can be applied to existing B2B projects by in-house development teams (if the use of higher level XML standards is addressed).

    The real problem, as always when manual processes become electronic ones, will be cultural. Web services are coming, and the technology has great potential to reduce integration costs and improve B2B processes. How much, and how quickly, business partners use web services to reduce costs and increase collaboration is another matter.

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    Ben Rossi

    Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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