Executive Briefings

A bigger footprint for Online Purchasing

The breadth and depth of web-based applications for managing procurement and sourcing is expanding to the point that it touches on just about every important business process a company performs.

The first real footholds for web-based supply-chain applications were e-procurement applications from vendors like Ariba and Commerce One developed in the late 1990s. They simply took the fragmented, paper-based process for buying indirect materials, put them on the enterprise systems where buyers could select items from approved-vendor catalogs, added electronic workflow for approvals and closed the loop with online orders to the vendors.

How the footprint has grown in just a few short years. In addition to indirect materials, companies source an increasing amount of direct materials and components with applications that are integrated with supply-chain planning systems, engineering applications and order management systems. They contract for logistics services, temporary labor and consultants online. They purchase and manage outsourced design and manufacturing services. The entire procurement process - from source to pay - is now web-enabled to include issuing of purchase orders and invoices, negotiation and monitoring of complex contracts and detailed analysis of spending patterns.

While most companies license enterprise-wide software to handle this ever-growing list of procurement and sourcing needs, it is equally possible to use hosted software on a subscription basis or to outsource the procurement process to vendors that not only provide the technology but also the purchasing expertise.

The footprint just continues to grow. According to Aberdeen Group, companies will double their spending on procurement and sourcing solutions to reach $9bn by next year.

The reason for this explosive growth is quite clear. Companies spend between 45 and 80 cents of every revenue dollar to buy materials or services from vendors. As companies increasingly outsource more and more of their operations, this percentage will just grow faster. Every percent or two saved in leveraged spending or operational efficiency immediately converts to profit. Next to selling more product, the fastest way for companies to boost profits is to improve the sourcing process.

To fill this need for better purchasing business processes, many existing procurement-oriented application vendors first broadened their coverage of more types of purchases (indirect, operational, services and direct materials), and then they deepened their offerings to handle more activities (catalog buying, purchasing execution, invoicing, contract negotiation, contract management, spending analysis, etc.).

For example, the original transaction-focused players in this space, such as Ariba and Commerce One, have rapidly expanded the depth and breadth of their footprints. Their built-in link to enterprise resource planning (ERP) makes them an attractive choice for companies that want to take in every type of material and transaction throughout the organization.

Ariba added sourcing service procurement components last year. More recently, Ariba has added modules for analysis, contract management, invoicing and analysis. In fact, Ariba has come up with a model based on the slogan "find it, get it, keep it" to help explain the content of its many purchasing modules.

Commerce One's new 5.0 suite of collaborative sourcing and procurement solutions provides full automation of enterprise source-to-pay processes, while also enabling deep connections between an organization and its trading partners. It leverages its enterprise-wide reach, as well as its collaborative abilities to link with suppliers. By expanding the capabilities of the suite, Commerce One provides an easy choice for its large installed base to add to their online procurement capabilities.

"With Commerce One solutions, Eastman Chemical integrates into suppliers' order processing systems for fast order entry and fulfillment," said Eddie Page, manager, eMRO, Eastman Chemical. "We've reduced the cost of materials by 5 percent, shortened order cycle times from over a week to 24 hours, lowered administrative costs and improved inventory practices to realize an overall return of 126 percent in under 10 months."

New entrants
Technology vendors from many other disciplines have seen the opportunity to provide solutions in this space and are extending their applications to reach into the realm of procurement and sourcing. They are coming at it from all directions.

Manufacturing-oriented vendors such as Agile Software are entering this arena from the engineering and design direction space to look at what it

"We've realized an overall return of 126 percent in under 10 months."
- Eddie Page, Eastman Chemical

calls the "product DNA level."

"Critical to every direct materials sourcing process is an accurate and timely description of what product is being purchased or manufactured," says Bill Schmitt, vice president of sourcing solutions for Agile. "We offer the only product sourcing solution that links tightly to this highly dynamic product chain DNA. As products change during the sourcing process, those changes are quickly visible to all parties involved - ensuring that the right parts are sourced, suppliers can provide the most competitive terms, and the process is optimized."

In the manufacturing world, the real focus of online purchasing is sourcing of direct materials. Activity in this area lagged behind indirect materials for several reasons, the major one being the need to integrate multiple business processes such as supply-chain planning, product development, and other collaborative activities that often extend to suppliers and other trading partners. The major procurement players at first avoided this space because of the complexity of the implementations and the integration.

Niche vendors pioneered direct materials sourcing. Frictionless Commerce, based in Cambridge, Mass., was among the first sourcing solution providers to focus on direct materials.

"Our model for building software is very simple," says Marc Osofsky, vice president of marketing and business development. "We get to know our Global 2500 customers very well. We learn what they are doing, what they want to be doing, and where the roadblocks are. By doing this, we are able to build applications that will work within their current enterprise framework, behind their firewall, and will drive the highest possible savings and process improvements. Everything that we deliver to our customers is designed to help them be more successful throughout the sourcing process."

The company recently released Frictionless Sourcing 2.0, which includes enhanced knowledge management functionality to automate the entire sourcing process. Specific functionality in Frictionless Sourcing 2.0 includes sourcing performance management to measure and monitor all aspects of the sourcing process, from collaborative project management to manage sourcing events such as projects with multiple, global stakeholders.

Unlike service-based solutions, Frictionless sits behind a company's firewall where it is integrated with e-procurement, ERP and product data management systems, so users can access data in disparate systems and locations. Companies build and reuse their own sourcing knowledge base - capturing critical sourcing information, and key learning from previous projects, vendor histories and negotiation details, rather than relying on outside partners to provide this data. This is possible because of the software's underlying flexible, scalable and collaborative system architecture.

Other niche sourcing players focus on specific verticals because sourcing processes tend to vary widely from industry to industry. Novopoint, for example, provides software and technology that enable collaboration and visibility of supply-chain activities among all manufacturers and suppliers in the CPG industry. The web-based Novopoint Network connects existing enterprise or legacy systems of all trading partners with a single, one-time integration.

Novopoint's internet-based business applications include integrated order management, contract management, collaborative planning, forecasting and replenishment (CPFR), financial services, logistics management and marketplace auctions. Using these applications, CPG manufacturers and their suppliers are able to automate orders and shipments, and provide quality analysis and document management, thereby reducing inventory and transaction costs.

By taking this industry specific view, Novopoint can leverage the existing relationships that have been longstanding in the CPG world. For example, of the more than 4,000 CPG manufacturers in North America, the top 20 percent account for approximately 65 percent of all sales (and purchases). A significant pain point for CPG manufacturers is managing the complexity of the inbound supply chain across many suppliers. Novopoint's value proposition is its ability to simplify that complexity, providing CPG manufacturers and their suppliers with a convenient, affordable and accessible way to achieve better supply-chain visibility and management.

Enter SRM
Among large applications that cover both indirect and direct materials, the trend is clearly to link all supply-chain related activities into sourcing suites. The recent move by Verticalnet to acquire sourcing solution provider Atlas Commerce and combine it with its own collaborative commerce capabilities points to this trend.

According to Nate Lentz, Verticalnet senior vice president of strategy and marketing, companies are beginning to shift from tactical sourcing initiatives to broader integrated strategic sourcing initiatives. The past several years can be characterized as a trial period for many companies.

"Divisions often independently initiated a number of stand-alone projects focused on tactical point solutions such as requests for quote, proposal or information (RFX), or reverse auction, or tested the waters with procurement services companies such as FreeMarkets," says Lentz.

He says today a number of trends are emerging that are driving companies to more integrated sourcing solutions because divisional purchasing sub-optimizes. For global enterprises to truly achieve purchasing scale, initiatives need to be cross-division or enterprise wide.

"In a world of division systems and disparate data, this requires a solution that enables the normalization of purchasing data across divisions while allowing each division to retain control of data naming conventions and system integrity," says Lentz.

Realizing savings from a sourcing event is not enough, according to Lentz. Companies need to integrate sourcing events with a process for identifying savings on an ongoing basis and for maintaining savings once they are contractually achieved. This requires a spend management solution which works across divisions to identify high priority opportunities - linked to sourcing events to realize the savings - and finally linked to key performance indicators (KPIs), supplier scorecards, divisional purchasing scorecards, and contract management to ensure that negotiated savings are achieved.

"Companies that view sourcing as truly a strategic initiative see this linked system as essential," he says. "While tactical sourcing events can be outsourced, a strategic sourcing system is inherently internal. Thus, companies that fully embrace a sourcing vision must drive this vision with internal solutions."

Verticalnet calls its solution Collaborative Supply Chain and offers applications for procurement planning, sourcing, contract negotiation and management and a wide variety of analytical tools.

Dan Tiernan, Verticalnet's senior vice president and chief technology officer says Verticalnet could just have easily used the term supplier relationship management (SRM).

"We consider SRM a subset of what we call collaborative supply chain," he says.

The trend is toward the term SRM, but whatever the label, the applications are similar. All of the large suite vendors, including SAP, PeopleSoft, i2 and Manugistics, offer SRM suites. The supply-chain application vendors tend to use their optimization capabilities and their ability to link manufacturing processes with outside vendors to essentially make sourcing an integrated extension of their other applications. The enterprise suite vendors tend to look at how they can integrate the SRM modules with the rest of their huge IT offerings. For example, SAP recently launched its SRM solution under the mySAP banner. The new mySAP SRM suite includes applications that support supply strategy, sourcing, purchasing execution, contract management, and relationship monitoring. It replaces the more narrowly focused mySAP E-Procurement brand.

Needless to say, mySAP SRM is designed to integrate with other SAP (and third-party applications) for supply-chain management (SCM), product lifecycle management (PLM), customer relationship management (CRM), as well as with the core SAP R/3 ERP application.

The SRM space continues to heat up. PeopleSoft SRM is already going into its second release; J.D. Edwards and Oracle are also in the running, along with newcomers like Eventra, Solvos, and ClearOrbit.

According to the research firm, Yankee Group, these vendors are clearly targeting CEOs, divisional VPs, and other top-level executives that desperately want to know, "What's going on? Where exactly do we spend money, and how can we make less money do more for us?"

SRM means different things to different people - to some it means a supplier portal where partners can communicate forecast and inventory data; to others it may mean an efficient way to give suppliers a "scorecard," and to others still it may be analytics to give a clear picture of what a company spent, and with whom. For very large companies looking for ways to manage and control their companies' spend, they will no doubt be looking at the ever-expanding SRM solutions.

Suffering Savings Leakages
In their short existence, internet-based sourcing, procurement, and supply-chain management (SCM) technologies have delivered considerable cost and performance benefits. However, as technology research firm Aberdeen Group points out, deployment of these technologies has often been isolated and disconnected from larger SCM and business initiatives. This fragmented approach has resulted in the "leakage" of procurement savings. Aberdeen has compiled these examples:

• Planning: Traditionally focused on production ("direct") material purchase requirements, most planning initiatives and engines fail to examine supplier capacity and capabilities. Planning technologies also overlook non-production ("indirect") expenditures, limiting opportunities to aggregate buying volumes and optimize purchase plans for indirect spending.

• Sourcing: Aberdeen research of early adopters of e-sourcing found that users reported cost savings of 14.3 percent, on average. However, most users were unable to fully implement or realize these savings. Reasons include a lack of savings implementation strategies, an inability to effectively communicate negotiated terms to the enterprise, and insufficient integration between e-sourcing and order execution systems.

• Procurement: Aberdeen research of e-procurement users found that enterprises push only 18 percent of total indirect spending through these systems, on average. Reasons for low penetration rates include a failure to conduct detailed spending analysis at the outset of a project, poor supplier enablement, and lack of a system adoption plan.

• Contract management: Nearly 80 percent of business transactions are governed by a contract, yet few companies effectively communicate and manage the terms of these contracts. As a result, companies miss huge savings opportunities by not enforcing internal compliance with contracts or ensuring appropriate price breaks and rebates from suppliers.

• Supplier performance measurement: Evaluating a supplier's operational and financial performance requires metrics to be assimilated from multiple enterprise systems. Capturing an accurate view of a supplier's current and future performance also requires enterprises to access information from external sources as well. Lack of insight into supplier performance can cause buyers to make poor sourcing decisions and to miss indicators of supply-chain risk.

As a result, most enterprises have only realized a fraction of the potential benefits of procurement and SCM automation. Such findings are evidence that advances in procurement and supply-chain technologies have outpaced the strategies needed to effectively deploy them.

Aberdeen believes a new framework it calls total cost management (TCM) will provide the supporting infrastructure necessary to identify, capture and maintain cost savings and operational efficiencies across all areas of enterprise spending - from operating supplies and business services to production materials, parts and assemblies.


Lower entry costs
However, electronic procurement and sourcing does not have to be a very high-priced solution that only the largest companies can afford. While fully licensing the most sophisticated packages is still quite pricey, companies with a tight IT budget can still get in the game.

While many e-procurement applications are packaged software that the user runs from its own server, there is also the hosted option that users can subscribe to on a usage basis. For example, GE Global eXchange Services (GXS) offers a hosted suite of e-commerce services to automate the supply chain "source-to-pay'' process that promises to help companies lower procurement costs, compress procurement cycle times, and lower working capital requirements.

The source-to-pay suite supports a wide variety of collaborative interactions between buyers and suppliers including supplier selection through requests for quotations (RFQs) or auctions, buyer acceptance, catalog purchasing of indirect materials from an electronic database of more than 1.5 million line items, invoice inquiry and payment settlement. All parties can view the process through a GXS web site customized for the buyer.

"GXS has helped thousands of buying organizations improve and automate the way they conduct business with their supplier community, from the large technology-savvy suppliers to the small paper-based suppliers,'' said Steven Scala GXS's vice president of marketing. "Our source-to-pay Services will enable buying organizations to extend even more of their business processes to their global supplier community, resulting in increased efficiencies, reduced costs and improved bottom-line performance.''

It is even possible to outsource the entire sourcing process. ICG Commerce, based near Philadelphia, for example, provides both hosted sourcing software and a comprehensive procurement service called Enabled Sourcing that accelerates the sourcing of direct and strategic goods and services. The engine behind ICG Commerce's Enabled Sourcing is a solution called RealSource, which in turn is powered by a solution called ePass from Emptoris. RealSource automates and optimizes the entire sourcing process from spend categorization and analysis to supplier qualification, negotiation, selection and management.

According to David Clary, vice president of Enabled Sourcing for ICG Commerce, whether customers use the platform themselves or work with ICG sourcing experts, RealSource provides customers a variety of flexible options in meeting their specific sourcing needs. For customers with extensive internal sourcing capabilities, ICG Commerce offers SelfSource - whereby customers receive access to the hosted RealSource platform along with activation services including implementation, training and pre-developed content including supplier lists and category specific RFX templates. For companies looking for sourcing assistance, FlexSource provides a range of sourcing. As an integral part of ICG Commerce's Enabled Sourcing services, RealSource handles sourcing of direct and strategic goods. Once the strategic sourcing process is completed and supplier agreements are established, ICG Commerce offers customers the unique ability to place electronic orders against these contracts through its proprietary RealExchange.

"What sets our Enabled Sourcing solution apart is the fact that we offer our customers the natural link from e-sourcing to e-procurement," says David Clary. "While our enhanced Enabled Sourcing solution provides companies with access to the latest tools, processes and services for more effective strategic sourcing, our ability to help companies transact these purchases ensures these savings actually hit the bottom-line and are sustained over time."

Industry exchanges
Among the first business-to-business exchanges on the web were so-called consortia-based markets, or COBAMs. They were created so entire industries - buyers and suppliers - could work closely to manage sourcing at a low entry cost that any supplier could afford. The majority of these COBAMs have been a disappointment. Suppliers saw little advantage in joining exchanges that made it easy for large buyers to leverage them on price. The integration proved difficult, especially for smaller suppliers. All players were wary of sharing information on these unfamiliar platforms.

There are some exceptions. Exostar, for example, is an exchange for the aerospace industry. It continues to grow in participation and in the breadth of services its provides. Exostar founding member Rolls Royce has joined with technology vendors Commerce One and EDS to transact business electronically with over 180 suppliers through Exostar's SupplyPass platform. Documents being transmitted are electronic planning schedules, goods receipt reports and invoice documents. The Rolls Royce global supply chain now has a single scheduling system.

"This is a step forward for Rolls Royce and our suppliers," said Richard Harris, the company's Exostar program manager. "The successful integration of these suppliers paves the way for the introduction of other electronic transactions in the future."

An additional 150 suppliers registered with Exostar in March, bringing the total direct procurement supplier base to 330.

"The acquisition program used to integrate these suppliers into Exostar demonstrates the potential of the internet to train as well as trade, saving precious time and money in an era of tightening budgets throughout our industry," said Stephen O'Sullivan, Exostar's executive vice president of sales.

At your service
Online procurement increasingly includes the purchasing of services as well as materials, and with good reason. According to the U.S. Department of Commerce, 75 percent of the U.S. gross domestic product is services. While services drive the economy, they account for less than 10 percent of e-commerce revenues, often because service providers face financial and technical obstacles in reaching and transacting with online or mobile buyers. So leading software procurement vendors are expanding to include services procurement, which ranges from hiring a temp to booking travel plans to managing contracts online.
According to Aberdeen Group, services procurement is an enormous, untapped cost-savings opportunity:

• 54 percent of corporate purchasing dollars are spent on services

• 41 percent of all service purchases are not controlled by the purchasing department

• $15bn is the potential savings in the U.S. from implementing tighter controls in procurement.

CascadeWorks is one of the first services-only e-procurement vendors. Its application, called Clarify, provides service procurement areas including training, equipment maintenance and repairs. The company works with such firms as Texas Instruments and Autodesk. For Texas Instruments, the solution will manage the entire services procurement cycle from requisition through to payment. Texas Instruments is also leveraging the flexibility offered through inter-enterprise applications achieving visibility, process efficiency, vendor management across all categories of services (including staffing, consulting, repair, maintenance and transportation) resulting in hard cost savings of 10 to 20 percent, increased efficiencies, and increased supplier quality. Clarity's latest release, 3.0, offers separate web-based modules for staffing, consulting and service agreements.

Getting analytical
The e-sourcing footprint for most applications now includes analytical tools that help determine how much has been spent, how much with each vendor and how efficient the procurement process is across an entire enterprise. While these tools are usually called spend management, they are much more than an accounting dashboard application.

Large, multi-divisional companies often have contracts for essentially the same product spread across too many vendors, just because no one knows about the contracts and pricing. Contracts are often negotiated, but buyers are unaware of them, so purchases are made with other vendors on less attractive terms. Vendors often do not apply the correct prices. Many similar gaps appear throughout an enterprise's procurement operation, and spend management applications are intended to find them.

"In today's down economy, cost containment is the biggest problem facing businesses," said Tim Minahan, vice president and managing director of supply-chain research for the Aberdeen Group. "Unfortunately, many organizations lack the necessary insight into their spending to continually identify and address opportunities for cost savings."

Most large procurement suites have added this functionality to their offerings. There are also stand-alone applications that perform the same function.

Zeborg, for example, recently introduced ExpenseMap to provide an automated and systematic approach to capture and analyze all corporate expenditures, empowering companies to identify opportunities for savings and develop the best strategies for capturing those savings.

"Companies are under enormous pressure to continually improve financial performance, yet their procurement practices don't address hidden inefficiencies. It's like a dam with a few tiny holes - the leak is constant but the source is extremely difficult to identify," says Arnab Gupta, chairman and co-chief executive officer of Zeborg. "Understanding spending patterns - exactly where, how, when and on what each dollar is spent - is key to gaining the insight they need to execute strategies for savings and improve control."

Companies can leverage ExpenseMap to develop a blueprint for attacking excess operational spending, which can account for nearly 60 percent of a company's overall expenditures. Armed with a better understanding of enterprise spending, companies can target specific procurement and savings initiatives for continuous improvement. ExpenseMap works with other applications such as i2, Ariba and Commerce One to extend their value by tracking employee adoption of these systems, measuring implementation success and modifying policies in response to actual buyer behavior. By using the application regularly, companies can monitor the results of all savings initiatives and easily update the data to reflect changes to their business.

Just about all sourcing applications offer some form of spend management analysis. The question is how broadly the application casts its gaze - just within specific e-procurement applications or throughout all enterprise applications. The need is for a broad view of spending.

Looking forward
So what does the future hold for e-sourcing and e-procurement?

More of the same, according to Chicago-based technology research company, Doculabs, which predicts that the procurement footprint will broaden even more as companies look for solutions that do more than automate current processes. Specifically, procurement will begin to encompass order management, relationship management, and collaborative planning.

"This convergence of procurement solutions is occurring at a time when organizations facing increased pressure to justify IT investments are reevaluating solutions against a framework of expanding requirements," Doculabs reports.

Also, as purchasing activities become more collaborative, procurement will increasingly take the form of recurring purchases between known trading parties that are not rigidly constrained by contracts.

"The increasing emphasis on collaboration will heighten the need for tools that promote information sharing, as well as contract management tools for monitoring contract adherence and enforcement," Doculabs predicts in a recent report entitled Enterprise Procurement Assessment.

Commerce One's director of solution strategy, Scott Wilkerson, thinks that the next big steps will not be with additional sourcing or procurement functions, but will enhance the value of these processes with better, faster and easier integration with other enterprise applications and with extended supply-chain partners.

The number one business issue is integration," says Wilkerson. "Making sourcing and procurement better can be accomplished simply by linking it more closely with other enterprise systems, legacy applications and with trading partners."

Wilkerson says that web services - messaging based on extensible markup language (XML) and similar open source protocols like SOAP and UDDI - are the way this connectivity will happen.

"Just think about the value created by sharing real-time information from suppliers, logistics services, banks and other financial services," he says. "Now you are transforming how businesses works. That is going to change the way applications are built. It will open up companies from propriety protocols and information exchange to open environment. You suddenly have the ability for any application to discover web services, establish a real-time connection, do a transaction or push and pull information and then update application data at either end. You are no longer bound by the way Commerce One or any other vendor built the app. Sourcing and procurement will be transformational to how entire industries operate."

The first real footholds for web-based supply-chain applications were e-procurement applications from vendors like Ariba and Commerce One developed in the late 1990s. They simply took the fragmented, paper-based process for buying indirect materials, put them on the enterprise systems where buyers could select items from approved-vendor catalogs, added electronic workflow for approvals and closed the loop with online orders to the vendors.

How the footprint has grown in just a few short years. In addition to indirect materials, companies source an increasing amount of direct materials and components with applications that are integrated with supply-chain planning systems, engineering applications and order management systems. They contract for logistics services, temporary labor and consultants online. They purchase and manage outsourced design and manufacturing services. The entire procurement process - from source to pay - is now web-enabled to include issuing of purchase orders and invoices, negotiation and monitoring of complex contracts and detailed analysis of spending patterns.

While most companies license enterprise-wide software to handle this ever-growing list of procurement and sourcing needs, it is equally possible to use hosted software on a subscription basis or to outsource the procurement process to vendors that not only provide the technology but also the purchasing expertise.

The footprint just continues to grow. According to Aberdeen Group, companies will double their spending on procurement and sourcing solutions to reach $9bn by next year.

The reason for this explosive growth is quite clear. Companies spend between 45 and 80 cents of every revenue dollar to buy materials or services from vendors. As companies increasingly outsource more and more of their operations, this percentage will just grow faster. Every percent or two saved in leveraged spending or operational efficiency immediately converts to profit. Next to selling more product, the fastest way for companies to boost profits is to improve the sourcing process.

To fill this need for better purchasing business processes, many existing procurement-oriented application vendors first broadened their coverage of more types of purchases (indirect, operational, services and direct materials), and then they deepened their offerings to handle more activities (catalog buying, purchasing execution, invoicing, contract negotiation, contract management, spending analysis, etc.).

For example, the original transaction-focused players in this space, such as Ariba and Commerce One, have rapidly expanded the depth and breadth of their footprints. Their built-in link to enterprise resource planning (ERP) makes them an attractive choice for companies that want to take in every type of material and transaction throughout the organization.

Ariba added sourcing service procurement components last year. More recently, Ariba has added modules for analysis, contract management, invoicing and analysis. In fact, Ariba has come up with a model based on the slogan "find it, get it, keep it" to help explain the content of its many purchasing modules.

Commerce One's new 5.0 suite of collaborative sourcing and procurement solutions provides full automation of enterprise source-to-pay processes, while also enabling deep connections between an organization and its trading partners. It leverages its enterprise-wide reach, as well as its collaborative abilities to link with suppliers. By expanding the capabilities of the suite, Commerce One provides an easy choice for its large installed base to add to their online procurement capabilities.

"With Commerce One solutions, Eastman Chemical integrates into suppliers' order processing systems for fast order entry and fulfillment," said Eddie Page, manager, eMRO, Eastman Chemical. "We've reduced the cost of materials by 5 percent, shortened order cycle times from over a week to 24 hours, lowered administrative costs and improved inventory practices to realize an overall return of 126 percent in under 10 months."

New entrants
Technology vendors from many other disciplines have seen the opportunity to provide solutions in this space and are extending their applications to reach into the realm of procurement and sourcing. They are coming at it from all directions.

Manufacturing-oriented vendors such as Agile Software are entering this arena from the engineering and design direction space to look at what it

"We've realized an overall return of 126 percent in under 10 months."
- Eddie Page, Eastman Chemical

calls the "product DNA level."

"Critical to every direct materials sourcing process is an accurate and timely description of what product is being purchased or manufactured," says Bill Schmitt, vice president of sourcing solutions for Agile. "We offer the only product sourcing solution that links tightly to this highly dynamic product chain DNA. As products change during the sourcing process, those changes are quickly visible to all parties involved - ensuring that the right parts are sourced, suppliers can provide the most competitive terms, and the process is optimized."

In the manufacturing world, the real focus of online purchasing is sourcing of direct materials. Activity in this area lagged behind indirect materials for several reasons, the major one being the need to integrate multiple business processes such as supply-chain planning, product development, and other collaborative activities that often extend to suppliers and other trading partners. The major procurement players at first avoided this space because of the complexity of the implementations and the integration.

Niche vendors pioneered direct materials sourcing. Frictionless Commerce, based in Cambridge, Mass., was among the first sourcing solution providers to focus on direct materials.

"Our model for building software is very simple," says Marc Osofsky, vice president of marketing and business development. "We get to know our Global 2500 customers very well. We learn what they are doing, what they want to be doing, and where the roadblocks are. By doing this, we are able to build applications that will work within their current enterprise framework, behind their firewall, and will drive the highest possible savings and process improvements. Everything that we deliver to our customers is designed to help them be more successful throughout the sourcing process."

The company recently released Frictionless Sourcing 2.0, which includes enhanced knowledge management functionality to automate the entire sourcing process. Specific functionality in Frictionless Sourcing 2.0 includes sourcing performance management to measure and monitor all aspects of the sourcing process, from collaborative project management to manage sourcing events such as projects with multiple, global stakeholders.

Unlike service-based solutions, Frictionless sits behind a company's firewall where it is integrated with e-procurement, ERP and product data management systems, so users can access data in disparate systems and locations. Companies build and reuse their own sourcing knowledge base - capturing critical sourcing information, and key learning from previous projects, vendor histories and negotiation details, rather than relying on outside partners to provide this data. This is possible because of the software's underlying flexible, scalable and collaborative system architecture.

Other niche sourcing players focus on specific verticals because sourcing processes tend to vary widely from industry to industry. Novopoint, for example, provides software and technology that enable collaboration and visibility of supply-chain activities among all manufacturers and suppliers in the CPG industry. The web-based Novopoint Network connects existing enterprise or legacy systems of all trading partners with a single, one-time integration.

Novopoint's internet-based business applications include integrated order management, contract management, collaborative planning, forecasting and replenishment (CPFR), financial services, logistics management and marketplace auctions. Using these applications, CPG manufacturers and their suppliers are able to automate orders and shipments, and provide quality analysis and document management, thereby reducing inventory and transaction costs.

By taking this industry specific view, Novopoint can leverage the existing relationships that have been longstanding in the CPG world. For example, of the more than 4,000 CPG manufacturers in North America, the top 20 percent account for approximately 65 percent of all sales (and purchases). A significant pain point for CPG manufacturers is managing the complexity of the inbound supply chain across many suppliers. Novopoint's value proposition is its ability to simplify that complexity, providing CPG manufacturers and their suppliers with a convenient, affordable and accessible way to achieve better supply-chain visibility and management.

Enter SRM
Among large applications that cover both indirect and direct materials, the trend is clearly to link all supply-chain related activities into sourcing suites. The recent move by Verticalnet to acquire sourcing solution provider Atlas Commerce and combine it with its own collaborative commerce capabilities points to this trend.

According to Nate Lentz, Verticalnet senior vice president of strategy and marketing, companies are beginning to shift from tactical sourcing initiatives to broader integrated strategic sourcing initiatives. The past several years can be characterized as a trial period for many companies.

"Divisions often independently initiated a number of stand-alone projects focused on tactical point solutions such as requests for quote, proposal or information (RFX), or reverse auction, or tested the waters with procurement services companies such as FreeMarkets," says Lentz.

He says today a number of trends are emerging that are driving companies to more integrated sourcing solutions because divisional purchasing sub-optimizes. For global enterprises to truly achieve purchasing scale, initiatives need to be cross-division or enterprise wide.

"In a world of division systems and disparate data, this requires a solution that enables the normalization of purchasing data across divisions while allowing each division to retain control of data naming conventions and system integrity," says Lentz.

Realizing savings from a sourcing event is not enough, according to Lentz. Companies need to integrate sourcing events with a process for identifying savings on an ongoing basis and for maintaining savings once they are contractually achieved. This requires a spend management solution which works across divisions to identify high priority opportunities - linked to sourcing events to realize the savings - and finally linked to key performance indicators (KPIs), supplier scorecards, divisional purchasing scorecards, and contract management to ensure that negotiated savings are achieved.

"Companies that view sourcing as truly a strategic initiative see this linked system as essential," he says. "While tactical sourcing events can be outsourced, a strategic sourcing system is inherently internal. Thus, companies that fully embrace a sourcing vision must drive this vision with internal solutions."

Verticalnet calls its solution Collaborative Supply Chain and offers applications for procurement planning, sourcing, contract negotiation and management and a wide variety of analytical tools.

Dan Tiernan, Verticalnet's senior vice president and chief technology officer says Verticalnet could just have easily used the term supplier relationship management (SRM).

"We consider SRM a subset of what we call collaborative supply chain," he says.

The trend is toward the term SRM, but whatever the label, the applications are similar. All of the large suite vendors, including SAP, PeopleSoft, i2 and Manugistics, offer SRM suites. The supply-chain application vendors tend to use their optimization capabilities and their ability to link manufacturing processes with outside vendors to essentially make sourcing an integrated extension of their other applications. The enterprise suite vendors tend to look at how they can integrate the SRM modules with the rest of their huge IT offerings. For example, SAP recently launched its SRM solution under the mySAP banner. The new mySAP SRM suite includes applications that support supply strategy, sourcing, purchasing execution, contract management, and relationship monitoring. It replaces the more narrowly focused mySAP E-Procurement brand.

Needless to say, mySAP SRM is designed to integrate with other SAP (and third-party applications) for supply-chain management (SCM), product lifecycle management (PLM), customer relationship management (CRM), as well as with the core SAP R/3 ERP application.

The SRM space continues to heat up. PeopleSoft SRM is already going into its second release; J.D. Edwards and Oracle are also in the running, along with newcomers like Eventra, Solvos, and ClearOrbit.

According to the research firm, Yankee Group, these vendors are clearly targeting CEOs, divisional VPs, and other top-level executives that desperately want to know, "What's going on? Where exactly do we spend money, and how can we make less money do more for us?"

SRM means different things to different people - to some it means a supplier portal where partners can communicate forecast and inventory data; to others it may mean an efficient way to give suppliers a "scorecard," and to others still it may be analytics to give a clear picture of what a company spent, and with whom. For very large companies looking for ways to manage and control their companies' spend, they will no doubt be looking at the ever-expanding SRM solutions.

Suffering Savings Leakages
In their short existence, internet-based sourcing, procurement, and supply-chain management (SCM) technologies have delivered considerable cost and performance benefits. However, as technology research firm Aberdeen Group points out, deployment of these technologies has often been isolated and disconnected from larger SCM and business initiatives. This fragmented approach has resulted in the "leakage" of procurement savings. Aberdeen has compiled these examples:

• Planning: Traditionally focused on production ("direct") material purchase requirements, most planning initiatives and engines fail to examine supplier capacity and capabilities. Planning technologies also overlook non-production ("indirect") expenditures, limiting opportunities to aggregate buying volumes and optimize purchase plans for indirect spending.

• Sourcing: Aberdeen research of early adopters of e-sourcing found that users reported cost savings of 14.3 percent, on average. However, most users were unable to fully implement or realize these savings. Reasons include a lack of savings implementation strategies, an inability to effectively communicate negotiated terms to the enterprise, and insufficient integration between e-sourcing and order execution systems.

• Procurement: Aberdeen research of e-procurement users found that enterprises push only 18 percent of total indirect spending through these systems, on average. Reasons for low penetration rates include a failure to conduct detailed spending analysis at the outset of a project, poor supplier enablement, and lack of a system adoption plan.

• Contract management: Nearly 80 percent of business transactions are governed by a contract, yet few companies effectively communicate and manage the terms of these contracts. As a result, companies miss huge savings opportunities by not enforcing internal compliance with contracts or ensuring appropriate price breaks and rebates from suppliers.

• Supplier performance measurement: Evaluating a supplier's operational and financial performance requires metrics to be assimilated from multiple enterprise systems. Capturing an accurate view of a supplier's current and future performance also requires enterprises to access information from external sources as well. Lack of insight into supplier performance can cause buyers to make poor sourcing decisions and to miss indicators of supply-chain risk.

As a result, most enterprises have only realized a fraction of the potential benefits of procurement and SCM automation. Such findings are evidence that advances in procurement and supply-chain technologies have outpaced the strategies needed to effectively deploy them.

Aberdeen believes a new framework it calls total cost management (TCM) will provide the supporting infrastructure necessary to identify, capture and maintain cost savings and operational efficiencies across all areas of enterprise spending - from operating supplies and business services to production materials, parts and assemblies.


Lower entry costs
However, electronic procurement and sourcing does not have to be a very high-priced solution that only the largest companies can afford. While fully licensing the most sophisticated packages is still quite pricey, companies with a tight IT budget can still get in the game.

While many e-procurement applications are packaged software that the user runs from its own server, there is also the hosted option that users can subscribe to on a usage basis. For example, GE Global eXchange Services (GXS) offers a hosted suite of e-commerce services to automate the supply chain "source-to-pay'' process that promises to help companies lower procurement costs, compress procurement cycle times, and lower working capital requirements.

The source-to-pay suite supports a wide variety of collaborative interactions between buyers and suppliers including supplier selection through requests for quotations (RFQs) or auctions, buyer acceptance, catalog purchasing of indirect materials from an electronic database of more than 1.5 million line items, invoice inquiry and payment settlement. All parties can view the process through a GXS web site customized for the buyer.

"GXS has helped thousands of buying organizations improve and automate the way they conduct business with their supplier community, from the large technology-savvy suppliers to the small paper-based suppliers,'' said Steven Scala GXS's vice president of marketing. "Our source-to-pay Services will enable buying organizations to extend even more of their business processes to their global supplier community, resulting in increased efficiencies, reduced costs and improved bottom-line performance.''

It is even possible to outsource the entire sourcing process. ICG Commerce, based near Philadelphia, for example, provides both hosted sourcing software and a comprehensive procurement service called Enabled Sourcing that accelerates the sourcing of direct and strategic goods and services. The engine behind ICG Commerce's Enabled Sourcing is a solution called RealSource, which in turn is powered by a solution called ePass from Emptoris. RealSource automates and optimizes the entire sourcing process from spend categorization and analysis to supplier qualification, negotiation, selection and management.

According to David Clary, vice president of Enabled Sourcing for ICG Commerce, whether customers use the platform themselves or work with ICG sourcing experts, RealSource provides customers a variety of flexible options in meeting their specific sourcing needs. For customers with extensive internal sourcing capabilities, ICG Commerce offers SelfSource - whereby customers receive access to the hosted RealSource platform along with activation services including implementation, training and pre-developed content including supplier lists and category specific RFX templates. For companies looking for sourcing assistance, FlexSource provides a range of sourcing. As an integral part of ICG Commerce's Enabled Sourcing services, RealSource handles sourcing of direct and strategic goods. Once the strategic sourcing process is completed and supplier agreements are established, ICG Commerce offers customers the unique ability to place electronic orders against these contracts through its proprietary RealExchange.

"What sets our Enabled Sourcing solution apart is the fact that we offer our customers the natural link from e-sourcing to e-procurement," says David Clary. "While our enhanced Enabled Sourcing solution provides companies with access to the latest tools, processes and services for more effective strategic sourcing, our ability to help companies transact these purchases ensures these savings actually hit the bottom-line and are sustained over time."

Industry exchanges
Among the first business-to-business exchanges on the web were so-called consortia-based markets, or COBAMs. They were created so entire industries - buyers and suppliers - could work closely to manage sourcing at a low entry cost that any supplier could afford. The majority of these COBAMs have been a disappointment. Suppliers saw little advantage in joining exchanges that made it easy for large buyers to leverage them on price. The integration proved difficult, especially for smaller suppliers. All players were wary of sharing information on these unfamiliar platforms.

There are some exceptions. Exostar, for example, is an exchange for the aerospace industry. It continues to grow in participation and in the breadth of services its provides. Exostar founding member Rolls Royce has joined with technology vendors Commerce One and EDS to transact business electronically with over 180 suppliers through Exostar's SupplyPass platform. Documents being transmitted are electronic planning schedules, goods receipt reports and invoice documents. The Rolls Royce global supply chain now has a single scheduling system.

"This is a step forward for Rolls Royce and our suppliers," said Richard Harris, the company's Exostar program manager. "The successful integration of these suppliers paves the way for the introduction of other electronic transactions in the future."

An additional 150 suppliers registered with Exostar in March, bringing the total direct procurement supplier base to 330.

"The acquisition program used to integrate these suppliers into Exostar demonstrates the potential of the internet to train as well as trade, saving precious time and money in an era of tightening budgets throughout our industry," said Stephen O'Sullivan, Exostar's executive vice president of sales.

At your service
Online procurement increasingly includes the purchasing of services as well as materials, and with good reason. According to the U.S. Department of Commerce, 75 percent of the U.S. gross domestic product is services. While services drive the economy, they account for less than 10 percent of e-commerce revenues, often because service providers face financial and technical obstacles in reaching and transacting with online or mobile buyers. So leading software procurement vendors are expanding to include services procurement, which ranges from hiring a temp to booking travel plans to managing contracts online.
According to Aberdeen Group, services procurement is an enormous, untapped cost-savings opportunity:

• 54 percent of corporate purchasing dollars are spent on services

• 41 percent of all service purchases are not controlled by the purchasing department

• $15bn is the potential savings in the U.S. from implementing tighter controls in procurement.

CascadeWorks is one of the first services-only e-procurement vendors. Its application, called Clarify, provides service procurement areas including training, equipment maintenance and repairs. The company works with such firms as Texas Instruments and Autodesk. For Texas Instruments, the solution will manage the entire services procurement cycle from requisition through to payment. Texas Instruments is also leveraging the flexibility offered through inter-enterprise applications achieving visibility, process efficiency, vendor management across all categories of services (including staffing, consulting, repair, maintenance and transportation) resulting in hard cost savings of 10 to 20 percent, increased efficiencies, and increased supplier quality. Clarity's latest release, 3.0, offers separate web-based modules for staffing, consulting and service agreements.

Getting analytical
The e-sourcing footprint for most applications now includes analytical tools that help determine how much has been spent, how much with each vendor and how efficient the procurement process is across an entire enterprise. While these tools are usually called spend management, they are much more than an accounting dashboard application.

Large, multi-divisional companies often have contracts for essentially the same product spread across too many vendors, just because no one knows about the contracts and pricing. Contracts are often negotiated, but buyers are unaware of them, so purchases are made with other vendors on less attractive terms. Vendors often do not apply the correct prices. Many similar gaps appear throughout an enterprise's procurement operation, and spend management applications are intended to find them.

"In today's down economy, cost containment is the biggest problem facing businesses," said Tim Minahan, vice president and managing director of supply-chain research for the Aberdeen Group. "Unfortunately, many organizations lack the necessary insight into their spending to continually identify and address opportunities for cost savings."

Most large procurement suites have added this functionality to their offerings. There are also stand-alone applications that perform the same function.

Zeborg, for example, recently introduced ExpenseMap to provide an automated and systematic approach to capture and analyze all corporate expenditures, empowering companies to identify opportunities for savings and develop the best strategies for capturing those savings.

"Companies are under enormous pressure to continually improve financial performance, yet their procurement practices don't address hidden inefficiencies. It's like a dam with a few tiny holes - the leak is constant but the source is extremely difficult to identify," says Arnab Gupta, chairman and co-chief executive officer of Zeborg. "Understanding spending patterns - exactly where, how, when and on what each dollar is spent - is key to gaining the insight they need to execute strategies for savings and improve control."

Companies can leverage ExpenseMap to develop a blueprint for attacking excess operational spending, which can account for nearly 60 percent of a company's overall expenditures. Armed with a better understanding of enterprise spending, companies can target specific procurement and savings initiatives for continuous improvement. ExpenseMap works with other applications such as i2, Ariba and Commerce One to extend their value by tracking employee adoption of these systems, measuring implementation success and modifying policies in response to actual buyer behavior. By using the application regularly, companies can monitor the results of all savings initiatives and easily update the data to reflect changes to their business.

Just about all sourcing applications offer some form of spend management analysis. The question is how broadly the application casts its gaze - just within specific e-procurement applications or throughout all enterprise applications. The need is for a broad view of spending.

Looking forward
So what does the future hold for e-sourcing and e-procurement?

More of the same, according to Chicago-based technology research company, Doculabs, which predicts that the procurement footprint will broaden even more as companies look for solutions that do more than automate current processes. Specifically, procurement will begin to encompass order management, relationship management, and collaborative planning.

"This convergence of procurement solutions is occurring at a time when organizations facing increased pressure to justify IT investments are reevaluating solutions against a framework of expanding requirements," Doculabs reports.

Also, as purchasing activities become more collaborative, procurement will increasingly take the form of recurring purchases between known trading parties that are not rigidly constrained by contracts.

"The increasing emphasis on collaboration will heighten the need for tools that promote information sharing, as well as contract management tools for monitoring contract adherence and enforcement," Doculabs predicts in a recent report entitled Enterprise Procurement Assessment.

Commerce One's director of solution strategy, Scott Wilkerson, thinks that the next big steps will not be with additional sourcing or procurement functions, but will enhance the value of these processes with better, faster and easier integration with other enterprise applications and with extended supply-chain partners.

The number one business issue is integration," says Wilkerson. "Making sourcing and procurement better can be accomplished simply by linking it more closely with other enterprise systems, legacy applications and with trading partners."

Wilkerson says that web services - messaging based on extensible markup language (XML) and similar open source protocols like SOAP and UDDI - are the way this connectivity will happen.

"Just think about the value created by sharing real-time information from suppliers, logistics services, banks and other financial services," he says. "Now you are transforming how businesses works. That is going to change the way applications are built. It will open up companies from propriety protocols and information exchange to open environment. You suddenly have the ability for any application to discover web services, establish a real-time connection, do a transaction or push and pull information and then update application data at either end. You are no longer bound by the way Commerce One or any other vendor built the app. Sourcing and procurement will be transformational to how entire industries operate."