How buying pencils online will help your business

Attention on ecommerce has been manically fixated on the business-to-consumer side - as anyone who reads The Sun will not need reminding, given its recent enthusiastic coverage of the wonders of the e-High Street.

Rumbling along in the background, however, is business-to-business (B2B). The smart money says this is where the real pay-off from using web technologies in business will prove to be.

It's been slow coming. But one of the UK's largest employers, the Ministry of Defence (MoD), has now announced it will introduce an ecommerce system so that it can trade more effectively with thousands of its suppliers.

The so-called eprocurement model - the process of automating the product purchases needed to run a business - is beginning to pick up.

Now, it's certainly true that eprocurement is the direct descendant of electronic data interchange (EDI), practised by large organisations for many years. It's also true that using fantastically sophisticated technologies to help you better order pencils off the web doesn't immediately strike one as wildly gripping.

But EDI is much, much easier to do using open standards and non-proprietary techniques such as those offered on the internet; and anything that automates any aspect of business, even a less glamorous one, will not be ignored by budget holders. Hence the buzz around eprocurement.

Early adopters
So far, analysts and vendors estimate that there are only 50 such projects currently in process in the UK. Early adopters include the likes of BT, retailer Boots and food giant Diageo, as well as the UK government. They will be joined by other big names this year: rival car manufacturers GM Motors and Ford both announced high-profile projects in the US last year, for example. BT says it will be conducting 95% of its purchase orders online by next month.

The MoD project is also part of a larger plan by Whitehall to see as much as 90 per cent of routine purchasing taking place electronically by next year. Again, this is gaining speed. The new government electronic shopping mall will conduct its first transactions by April.

"We are seeing large companies starting on eprocurement projects," said GartnerGroup research director Alexander Drobik. "Their efforts will touch hundreds of companies."

The aim, of course, is firstly to realise savings. Predictions of potential cost efficiencies vary, but Gartner estimates that implementing an eprocurement strategy can cut purchasing costs by between 50 and 60 per cent.

Some users say that's conservative. "You really can reduce costs by up to 90 per cent if you radically adopt ebusiness," claims Steve Brady, general manager of data and internet solutions marketing at BT.

In demand
The promise of such cost savings are making eprocurement firms hot picks. While analysts have yet to break down figures specifically for the eprocurement market, the segment represents an important piece of the business-to-business ecommerce sector.

Interestingly, Gartner says the strongest regional growth in business-to-business ecommerce is in Europe, where B2B revenue totalled $31.8bn (£19.7bn) in 1999. In 2004, the European B2B market may be as high as $2.3 trillion.

No wonder eprocurement software suppliers do well on the stock markets. Commerce One floated last year, and, although it has yet to make a profit, it has a market capitalisation of about $13bn.

And that on sales of only $33.6m last year. Rival Ariba is, on paper, a $21.8bn operation, on sales of $45.4m; and even smaller UK rival Infobank would cost you £1.7bn to buy, even though its half year only showed revenues of £25.8m.

Online markets
While the software these vendors supply was originally for automating your firm's purchasing process, they are now concentrating on setting up procurement websites that act as an online market.

There are two main models for doing this: large organisations building their own marts to trade with their suppliers and customers, or independent companies setting up specialised ecommerce web sites, where suppliers and buyers pay a fee to join and also per transaction.

"There will be a place for lots of types of exchanges. The fact that the major corporate players are beginning projects not only validates the market, but means that others will have to follow if they want to continue trading with large companies," argues Chris Phillips, director of marketing at Commerce One.

All well and good. But Gartner's Drobik argues that there are wrinkles left to be worked out - not least getting your suppliers to adopt your automation mantra. "All eprocurement vendors offer functions to send orders by email or fax which can then be handled manually. They wouldn't do this unless there was a genuine need to do so."

BT's Brady says he still comes across suppliers slow to adopt the eprocurement mentality. "We approached suppliers individually, as not everybody is at the same level." But he says this is not an insurmountable problem.

Rules of the game
Eprocurement will not achieve its potential savings target unless the software is used to eliminate manual inefficiencies, warns Forrester analyst Laurie Orlov.

"A new application does not guarantee new behaviour, or savings," he says. "Instead of firms using electronic versions of paper-based processes, they must identify and automate their approval criteria."

Forrester also recommends the use of business rules to allow applications to pass transactions between computer systems without interruption.

Companies will then rely on software alerts when an unexpected or inappropriate event has occurred. Drobik concurs.

"The trouble with IT is that if you have a bad process and you automate it, then you just get an expensive bad process."

To get the best out of eprocurement, don't just switch out EDI for new web software, but look at your business processes as well. Who would have guessed that ordering pencils from the web could be so complicated?