Your company can buy almost anything over the Internet, but is the ordering process as good as it gets?
Probably not. Until recently, Internet-based procurement was necessarily sloppy; it required juggling separate catalogs and transaction processes for each online supplier. Each catalog had to be maintained, and users couldn’t aggregate purchases to get the best volume prices. Such catalogs also made shopping difficult, whether looking to buy raw materials or software products.
Enter digital marketplaces — the latest wave in business-to-business commerce — where buyers and sellers trade money for goods over a secure procurement network. Digital marketplaces, also known as exchanges, have hit full speed in the past nine months.
You can build a private marketplace for your company or join semipublic marketplaces. The latter are ad hoc purchasing consortiums hosted by a third party. These hosts may be marketplace software vendors, such as Ariba or Commerce One, that offer a variety of goods for sale. Or they may be virtual companies, such as Chemdex, Global Food Exchange and VerticalNet, aimed at a vertical market.
In any case, cost savings abound. By aggregating buyers into a single site, sellers can afford to offer bigger discounts.
"Digital marketplaces are where the action is," says Jack Staff, chief Internet economist at Zona Research, a market research firm in Redwood City, Calif. Published pricing and increased competition among sellers will drive prices down, and that’s good for buyers, he says. Ultimately, it’s good for sellers, too, because lower prices will be offset by higher volumes, provided sellers participate in multiple marketplaces, Staff says.
If you build a private system, purchase orders can be generated with a click of the mouse. Orders can then be routed through required approvals, eliminating costly human administrators. By putting all suppliers in a central Web-based catalog, your purchasing department can easily compare prices.
Savings are further achieved by aggregating corporatewide orders to the same suppliers. This makes it easier to negotiate discounts. And you can pump all exchange-related procurement data into corporate accounting or enterprise resource planning applications for budgeting, scheduling and other analysis.
In fact, users such as Hewlett-Packard have found a company can reduce its administrative costs a hundredfold. Since June, HP has been buying goods over Sunnyvale, Calif.-based Ariba’s digital marketplace, one of several online exchanges that have sprouted up over the past year. For HP, Internet-based procurement has expanded from just office supplies and computers to: software; maintenance, repair and operating products; network equipment; marketing print services; consulting services; and even temporary labor.
"Before, we had a couple of sites that were operated manually with a custom Web site for every commodity," says Gregson Siu, global solutions center manager for HP’s operation procurement organization in Palo Alto. "Now anything I can buy, I can put in a single catalog," he says.
As of December, HP had deployed the marketplace to about 500 employees, pausing its rollout in January as a Year 2000 precaution. The company is now back on track with deployment to the rest of its North American operations, meaning approximately 80,000 employees. HP calculated it was spending about $125 per purchase order in labor fees. When its rollout is completed in the next few weeks, Siu estimates it will cut that amount to $10 per purchase order, by reducing administration. The kicker is HP will save an additional 5% simply by restricting purchases to prenegotiated catalog items and by buying these items in volume, Siu says.
Restrict the rogueWith digital marketplaces, buyers may purchase directly from a catalog using their company’s prenegotiated pricing. This frees them from a lengthy approval process. It also prevents what is known as "rogue buying," in which users stray from approved products to find a better deal. In truth, unsanctioned purchases actually increase costs because they aren’t tracked by the company. So they would be excluded from volume discounts and typically require manual administration — a person must see to approvals, purchase orders, system input and other issues. With marketplaces, users can be restricted to seeing only approved items. Aggregation and procurement policy enforcement are automatic. This isn’t as restrictive as it sounds, nor does it mean having to recreate every supplier’s e-commerce site. Like a personalized shopping portal, a marketplace can host links to approved suppliers’ sites, serving up contracted prices. For instance, marketplace buyers can link to Dell’s www.dellware.com and get their own prenegotiated prices rather than working through a Dell-created catalog on the Ariba network. By ordering via the marketplace, the transaction, along with all its administration and integration with back-end systems, is done by the marketplace. As for the transaction itself, most marketplaces offer a choice of formats, such as electronic data interchange, fax, e-mail or XML. The latter is the most popular method, particularly for those without legacy online procurement systems.Easy to join, hard to leaveMarketplace options are vast and growing bigger. There are marketplace specialists including Ariba, Clarus, Commerce One, Intelisys Electronic Commerce, Trilogy Software and TimeØ, a Perot Systems business. Likewise, ERP powerhouses have jumped in, including SAP AG with its mysap.com network and Oracle with Oracle Exchange. Plus, vertical exchanges have cropped up for virtually every industry. Some sites, such as Verticalnet.com, even host numerous vertical exchanges. Each vendor makes money by marrying buyers with sellers, but how they assess fees varies. Ariba, for example, charges per transaction, but the company and its buyers keep the fee a closely guarded secret. In contrast, Clarus uses a subscription model, charging $995 per month. Vertical sites typically operate under an auction model in which a request for proposal is issued and several suppliers bid on it (see story). The attraction to sellers is increased access, far beyond traditional sales methods and even farther beyond what their existing network infrastructures can handle, says Dave Reinke, vice president at Braun Consulting, a Chicago marketplace consultant, which helped create BidBuyBuild. com, a marketplace for the construction industry. "Suppliers don’t have enough exposure to all contractors, and contractors don’t get the full breadth of suppliers because they are limited by the bandwidth of their existing sales networks," he says. Marketplaces also vary in how they process transactions. Some, such as Ariba, do the processing on their networks, inside their own firewalls, and others, such as Clarus, put that task in the users’ hands. "We put a portal out there, just like the Ariba portal or the Commerce One portal, and we provide a lot of profiling information, catalog management services and the ability to do commerce between buyers and suppliers," says Steve Jeffery, president and CEO of Clarus. But, he says, Clarus doesn’t process the transaction itself. While your company today would need to join two separate digital marketplaces — a horizontal one to procure office supplies and a vertical one to buy raw materials — expectations are that these two worlds will soon merge. Horizontal digital marketplaces have begun to set themselves up to offer vertical exchanges as a subset of their existing sites. "The final step is to link these exchanges with smaller grass-roots exchanges like Chemdex and e-STEEL . . . to make a single integrated buying experience," says Lou Unkeless, senior director of applications marketing at Oracle. To narrow down the choices, start by assessing the number of transactions your company will complete each month. That will allow an apples-to-apples comparison between fee-based and subscription services. Also, while the list of participants on a network is important, don’t be overly concerned with it. Each vendor is feverishly trying to populate its network with as many buyers and suppliers as possible by making joining as easy as launching a browser. Within weeks after it launched last fall, Oracle claimed to have 270 companies signed on to be sellers and more than 400 customers. By the end of January, it claimed that it had 950 companies registered as participants. Clarus claims to have 30 companies implementing its framework today, totaling 200,000 employees with access to its network. Clarus also claims to have collected several hundred manufacturers and resellers participating with sellers on its network. Of course, don’t let the easy-to-join guise fool you. Choose a marketplace carefully, particularly if you must invest in the vendor’s software and integrate it with existing network and back-end systems. "This is the classic relationship between buyer and seller: They want to make the setup cost low and switching costs high. Every change is going to cost a lot, and it’s going to be extremely painful," says Rob Kelley, vice president of e-business development at Broadreach Consulting in Wayne, Pa.Security gotchaWhile users say integrating marketplace software with back-end systems is fairly simple, they also point out that there are some gotchas. One is security, a major concern for Visa International in Foster City, Calif. A year ago, it opted to join Ariba’s marketplace to replace a manual procurement system for office supplies, and ran into a conflict with its security policies. The concern surfaced over Ariba’s model of processing transactions on its own network behind the Ariba firewall. That meant Visa users had to send sensitive buying data over the Internet. "All of a sudden, we were going to have purchase orders sent via the Internet and have people going outside the company’s firewalls," says Brian Hall, Visa’s vice president of procurement. Ultimately, Visa adjusted its policy to use Ariba’s marketplace, but first the company learned all it could about potential vulnerabilities.
Another gotcha is that these marketplaces may require beefing up your infrastructure. Visa, for instance, purchased two Windows NT servers in order to run Ariba’s software in development and production modes. Savings on administration costs more than offset the price of these infrastructure upgrades. In the year since its deployment, Visa has reduced its labor costs by 66% and increased the cycle time for processing requests by 21%.
Visa’s procurement network is currently accessed by 2,000 employees, but this quarter the company anticipates rolling it out to all 4,000 domestic employees. Visa expects to achieve its return on investment within two years.
However, maintenance of a marketplace is more than just routine software administration, Hall warns. It requires constant monitoring of procurement policies and organizational structure to ensure that the system’s automatic workflow features remain accurate. "From the IS perspective, a project like this really needs to have dedicated resources for ongoing management of the software," Hall says.
Vertical or horizontal, digital marketplaces are coming on fast, and they appear to be offering buyers and sellers an equal array of benefits. Efficiencies and cost savings have already been seen. The only factor left to prove is whether businesses will turn to them en masse.
A sampling of digital marketplaces
Some marketplaces are horizontal services, selling a variety of products
relevant to any business. Others are services aimed at specific verticals.
Several vendors simply sell e-marketplace software, so users can build
their own.
Horizontal marketplaces
Vertical marketplaces
Marketplace software vendors Henry is a freelance writer in San Carlos, Calif. Send this article to a colleague
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