Analysis: E-procurement back on the agenda

Of the many technology revolutions promised during the boom years of the late 1990s, e-procurement was one that fell a long way when bubble burst and CFOs started asking about returns on multi-million pound systems often bought for no better reason than everyone else had one too.

Most e-marketplaces and e-auctions quickly disappeared into financial black holes after failing to get enough users or their vertical suppliers to buy into the model.

Sourcing and procurement software revenues also went into freefall – dropping 28 per cent and 23 per cent in 2002 and 2001 respectively according to Gartner – leaving the supply chain and e-procurement companies such as Ariba, CommerceOne and i2 to face up to a very different world and increased competition from the established ERP vendors such as SAP.

Ariba had its fair share of troubles with restated accounts and CEO resignations but when former CFO Bob Calderoni took over as CEO he tightened the reigns and the focus and re-invented the company around the term 'spend management'. And after eight straight quarters of good financials and the recent acquisition of rival FreeMarkets almost under its belt, things certainly seem to be looking healthier.

In an interview with silicon.com at the company's annual conference in Venice, Calderoni said the addition of FreeMarkets' services and consulting gives the company a huge cross-sell opportunity and gives it a much broader offering to fend off competition from the likes of SAP, which can just sell an add-on module to ERP users.

"The only thing SAP's procurement product allows them to do is catalogue-based procurement. That's a tiny piece of the puzzle," he said. "We know more about procurement than any company out there – not just SAP or Oracle. That's like saying I'm the tallest midget. We can bring technology and service together."

Indeed many of Ariba's customers – which include the likes of British Airways and pharmaceutical giant Aventis – are SAP, Oracle and PeopleSoft users.

Aventis started down the Ariba road in 2001 and has spent over €10m. Kai Nowosel, head of the global purchasing commercial operation at Aventis told silicon.com the business case was based on a return on investment within 18 months.

Most of this, he says, has come through reducing 'maverick' spending and directing more of the entire organisation's annual €6.5bn spend through the central e-procurement system and consolidating the number of suppliers. But he admits it is hard to quantify how much the software is responsible for.

"We have seen return on investment but I don't know if it is all related to the tool or if it would have come anyway," he said.

For example, much of the supplier consolidation happened by eliminating firms that had not been transacted with in the last 24 months but were still registered in the SAP system as an active supplier.

Beth Barling, analyst at AMR Research said that huge savings can be achieved purely by simplifying processes and consolidating suppliers, but the software makes it easier and allows firms to identify other opportunities for savings and improvement.

"When you buy in a new system it is a good catalyst for change," she said.

Ariba's Calderoni claims momentum is growing once again behind electronic sourcing and procurement, but he said it is increasing the chief procurement officer (CPO) and not the CIO or IT director behind the decision.

"Four or five years ago CIOs were making all of these decisions. I think that's why a lot of stuff was purchased and then never put to productive use," he said. "Today there's fewer decisions being made but when those decisions are being made it is being led by a line organisation and in our case it is the CPO or occasionally the CFO. When the CPO is making the decision I can't remember losing to an ERP guy."

In the meantime Calderoni said Ariba's focus is on integrating the FreeMarkets consulting and services expertise once the deal closes in May or June.

"When we integrate with Freemarkets we only have 20 per cent overlap in terms of customers so we fully expect to be able to sell their services into our customer base and our products and services into their customer base. That is going to be a nice catalyst for growth as well," he said.

AMR's Barling agrees with Calderoni that organisations will be increasing spend on e-procurement software but she said the main competition to Ariba will be the ERP vendors.

"The biggest threat is the incumbent ERP vendors," she said. "What we are seeing in ERP implementations is a lot of consolidation. If companies go that way and move to single instances it makes it easier just to add a module from SAP."