Hey, Big Spender

SAN FRANCISCO (03/05/2000) - Big bosses have traditionally paid little attention to their companies' purchasing departments. Why should they?

Procurement was boring.

You flipped through a catalog of ugly office furniture, then left the mundane details to the purchasing peons in the bowels of the building. That's all changing. Purchasing used to be "perceived as a cost center, kind of an afterthought," says Greg Doman, VP of e-commerce at Hilton Hotels, which began testing purchasing software from Commerce One last summer. Now purchasing is "at the forefront of our business-to-business e-commerce strategy." Purchasing officers still don't get the best parking spots in the company lot, but they are receiving more attention from the corporate brass - and some fancy new toys to play with. Online procurement systems automate the process of ordering supplies and approving payments. They let employees browse product catalogs.

They list preferred providers with which your company might have negotiated group discounts. They can even be set up to allow different buying privileges for different employees.


Sales of e-procurement software soared from $150 million in 1998 to $800 million in 1999, according to the Aberdeen Group of Boston. So far, most companies are using online b-to-b services to buy so-called nonessential supplies - things like pipe fittings and office furniture - rather than raw materials. Corporations that bought the complex software to automate procurement are betting that their long-term savings will offset the upfront expense. More optimistic estimates suggest companies can cut the cost of processing a purchase order from more than $100 to less than $10, thanks mainly to the reduction in paperwork and administrative hours. So far, few firms have anything more than estimates of the return on their investment in the technology - which typically runs several million dollars at a large company.

And it isn't easy to translate entrenched purchasing processes to software.

For one thing, the software needs to be meshed with systems running in other business departments - such as accounting, manufacturing, inventory management and human resources. Not surprisingly, procurement software has mostly been a game for the big boys. One way to ease the transition to online purchasing is to tack on procurement software provided by the same vendors that automated other departments. That's what Hormel Foods did. Hormel had used Oracle accounting software for three years when it recently decided to add Oracle Internet Procurement.

"The No. 1 priority was to get our company books done much faster. Purchasing kind of got dragged along," says Don Nelson, the Austin, Minn.-based firm's director of purchasing. His department is now beefing up its online efforts.

About 200 Hormel employees, who buy some $500 million in supplies every year, will start using the system by late summer. They'll use a browser to access applications hosted on-site at Hormel. Nelson wants to limit the number of suppliers his people use to source products and that's more easily managed in-house than at Oracle facilities.

Competing in the same market with Oracle are a number of enterprise software companies, including Germany's SAP and J.D. Edwards of Denver. There are pure-play vendors like Ariba and Commerce One and second-tier contenders like RightWorks and Intelisys. Ariba software is currently streamlining the purchasing process at a Chevron oil field in Bakersfield, Calif. The company shelled out more than $1 million for the software, which now handles $3 million to $5 million worth of purchases a month, roughly 80 percent of the supplies necessary to run the oil field. But the firm still doesn't quite have a handle on the return on its investment, says Jerry Jacobson, procurement manager.

"Most of these ROIs have two components," he explains.

First: Does the software lower the administrative cost of completing a transaction? Second: Does it help you get lower prices on supplies? Those questions aren't easy to answer. It's costly to maintain a lot of electronic connections, so automated procurement often means doing business with fewer suppliers. And if doing business with fewer suppliers leads to volume discounts, how much credit should the software get? Jacobson says Chevron at least has a better handle on what it's buying and that, in itself, is valuable information.


When Chevron and Hilton decided to automate their purchasing, installing software on their own systems was the only viable option. The market is different today, though, and both companies say they might decide in the future to rent the applications from an external company and access them via the Internet. A lot of firms just now switching to automation may go directly to renting, which is increasingly seen as an efficient way to deliver enterprise applications to corporate users.

Companies are starting to realize that gathering and maintaining data from a lot of different suppliers is harder than they thought. Commerce One leases purchasing services through its MarketSite.net online marketplace. Ariba has a similar site called Ariba.com. A number of smaller players like Works.com of Austin, Texas, are also getting into the game. "I don't believe you can sell a procurement package to a small business," says Works.com CEO Bo Holland. "Their ability to consume technology is limited."

One example is CampusPipeline.com, a 160-person company in Salt Lake City that provides intranet technology to colleges. It didn't need the full-blown functions contained in most purchasing software, let alone the larger enterprise-planning packages. The Web sites of office-supplies retailers didn't do the trick either. So the company called Works.com last year. "A Web-based service was more than adequate for us at this point," says CampusPipeline CFO Robert J. Simmons. "We need things to be simple and easy, but also to have good reporting."

Large or small, a company's purchasing tends to involve three processes: finding and ordering the product, getting it to the door and handling payment.

Software packages typically handle the purchasing and payment steps. But online marketplaces, which are an extension of the trend toward hosted purchasing applications, are trying to cover all three steps in the procurement process.


Not surprisingly, the contenders here are also Ariba and Commerce One. Commerce One's MarketSite.net was first to market, in late 1998. Since then it has struck deals to construct marketplaces for heavy-industry heavyweights such as Shell Oil, Schlumberger and General Motors. Playing catch-up, Ariba last March launched Ariba.com, which also provides links to suppliers' sites and lets buyers browse product catalogs from suppliers such as Boise Cascade and Grainger. Both Ariba and Commerce One recently purchased auction-technology companies.

Ariba paid $400 million in stock for Trading Dynamics, and Commerce One coughed up $231 million in stock and cash for CommerceBid, which was founded by a group of Microsoft veterans. The moves support the thinking that companies will want to bid on goods rather than rely on the contract process that dominates most business-to-business commerce today. With all the different procurement offerings - buying software, renting the services, shopping at a marketplace - it's still too early to tell which vendors will emerge as dominant.

Certainly the towering market valuations of Ariba and Commerce One suggest they're in the lead. But the landscape could change. Different industries have different requirements and procedures, which shape the way they buy their supplies. "As long as those variations [exist], there is no single monolithic solution," says Torrey Byles, analyst for Granada Research in El Granada, Calif. "The software market can sustain a lot of independent vendors."

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