B2B software vendors seek new revenue source
There's a new supply-side economics to business-to-business electronic commerce. After focusing on how make e-commerce attractive to buyers and making products ready for sale, software vendors are looking further upstream in the supply chain for business processes to automate.
Ariba last week bought Agile Software for $2.5 billion in stock to add collaboration software to design parts. I2 Technologies, harking back to its $9 billion acquisition of Aspect Communications last June, rolled out a supplier relationship management suite, which matches purchasing according to expected product demand.
Established Enterprise Resource Planning companies like Oracle and new start-up companies like B2eMarkets and Frictionless Commerce are also setting their sights on this upstream market.
The prize? It's called strategic sourcing of direct materials. Jargon aside, that means the process by which manufacturers choose the suppliers who provide the parts and raw materials used in the products they make. "It's the Willie Sutton model. That's where the money is," said Pierre Mitchell, analyst at AMR Research.
From 70 percent to 80 percent of a company's budget goes toward buying "direct goods," the mission-critical parts and raw materials that are used in what manufacturers make and what retailers sell. Buyers want to make sure suppliers can reliably deliver the quality and volume they want. Figuring out which supplier to sign for such critical, long-term contracts is called "sourcing."
This means that 70 percent to 80 percent of the savings a company can generate are found here, and they have become more important than ever.
Purchasing decisions are more critical to profits than ever before, said Scott Alaniz, an analyst at Stephens Inc.
The costs of manufacturing goods have tripled in the last 30 years, as a result of decades of outsourcing. The pressure to cut costs has increased as well. "Purchasing essentially becomes operations," Alaniz said. "You really have to have some analytics."
At the same time, the complexity of decisions has increased.
"There would be five bids and a cloud of dust, and you take the cheapest one. But with mass customization, new business models, you look at more than price, like the ability to ramp up and down, quality," Alaniz said.
All these pressures have pushed businesses to look beyond the spreadsheets and consultants they have relied upon to make their decisions.
"The two existing approaches are inadequate," Alaniz said.
Purchasing agents have been hamstrung by many factors, said Dave Horne, senior vice president of i2's supplier relationship management suite. It starts with poor forecasts of how much demand a company will face. They also lack contact with engineering departments, which change parts.
Finally, they need better software to track whether suppliers are delivering on time, meeting quality requirements, ramping up production and meeting other contract requirements. "We're tying it all together," Horne said.
I2 further has the backing of its partnership with A.T. Kearney, a consulting firm known for helping companies to find suppliers. Analysts generally agree that i2 has the best position from which to enter the market.
"I2 is really the gorilla," Mitchell said. "They have the most functionality and the biggest footprint, but they have to stitch the toes together. It's also the most fragmented and expensive suite out there." E-procurement software maker Ariba bought SupplierMarket.com last summer, but it took the Agile deal to give it new strength in collaboration and new access to sourcing. As for Commerce One and its partner SAP, he said, "They don't really have a solution around this yet."
Commerce One officials say their products are underrated, and range from design and sourcing through procurement and payment, and has customers like General Motors that use its products for sourcing.
"The value to customers is having solutions that address the entire work process," said Steve Viarengo, director of solutions strategies.
Commerce One does hope to move from commodity and indirect sourcing to complicated sourcing of highly engineered parts, and is working with SAP to develop software for this.
ERP vendors like Oracle face two problems. Their sourcing software products work best when inside their own native environment, and have trouble working as a best-of-breed solution that can work well with outsiders.
Nevertheless, Oracle's range of products and massive customer base give it a leg up on the market.
"Oracle is coming out with a business place concept, an Internet-based hub used to handle all kinds of business requirements, such as demand forecasting, strategic sourcing," said IDC analyst Albert Pang.
Since the market is so new, nothing should be taken for granted.
"It's too early to tell if anyone has an early lead," he said. Furthermore, smaller and nimbler companies could take big chunks of the market.
"What's new is companies are trying to deliver point solutions that could render some large blocks of software obsolete," Pang said.
According to Alaniz, only 20 or so of these companies have made it past Series C financing - the stage of venture financing at which they become viable companies, while still fragile enough not to build a business at all.
One of them claims an early lead.
Seven months after introducing its subscription service, B2eMarkets claims it has handled $750 million worth of transactions for its 16 customers.
"That's real liquidity," said Richard Waugh, executive vice president and one of two former General Electric officials who founded the company.
"The market has heated up," said Waugh, who plans on the company using speed to stay alive. "Against very large players you can't stand still."
After adding a negotiation module in its latest product, the company plans to tackle "category management." By that he means the process that companies use to find their suppliers. Companies often lose this knowledge when they bring in consultants to do it for them, he said. "We don't see anybody else doing anything resembling that."
But even among the small vendors, competition is fast. Frictionless Commerce said on Monday, Feb. 5, that it is introducing new software that tackles the same problem.
"The problem is helping people collaborate across the organization, manage things as a project, and keep knowledge within the organization," said Eric Levin, vice president of marketing. Previous software solutions haven't risen to this level of organizational coordination, and that has been a problem.
It's necessary to have this level of organizational coordination for strategic sourcing, but technological barriers have stood in the way. "If this is so important, why hasn't it been automated before? This is pretty hard technology," Levin said.
Speed isn't the only tactic for these smaller companies. Emptoris, another startup that enables sophisticated requests for proposals, plans to grow by making alliances.
"Our strategy is to partner with them," said Avner Schneur, founder and chief executive officer, citing deals with E.piphany, RightWorks and Sapient.
"We are a point solution that can power a specific piece, the sourcing piece. That's the significant value-add."
With myriad difficulties but massive opportunity, analysts expect that only a few of these small companies will survive. Most will be acquired or bundled with larger software packages.
"You'll see lots of point solutions and tool vendors get 'OEMed' and probably bought by a larger player," Mitchell said, referring to partnerships with original equipment manufacturers and big software makers.