E-procurement: friend or foe?

The small business sector is becoming ever more attractive to e-procurement companies as confidence in the business-to-consumer sector falters, and research company IDC estimates that 80 per cent of ecommerce revenues will come from business-to-business operations by 2003.

E-procurement puts purchasing power into the hands of small businesses, which can more easily source the best price and, using the 'reverse auction' model, ask a number of suppliers simultaneously to bid for relatively low value requirements. This facility is offered on the mondus.co.uk website, which was recently placed third in the Sunday Times/Bathwick Group E-League of the top 100 European ecommerce firms. Less common is the 'exchange' model where multiple buyers meet multiple sellers.

This type of procurement is also available in the form of a hosted application, whereby the supplier hosts the e-procurement software solution and/or supplier catalogues used by the small business. This has the effect of centralising e-procurement with the resulting benefits of greater control and economies of scale. It can have the possibly adverse effect, however, of tying business buyers to the supplier catalogues listed once a particular software protocol is adopted.

A link in the chain
Larger companies are increasingly getting involved in e-supply chains, which are as good as closed to small businesses that lack the buying clout or technical background to get involved. Prem Athwal, UK sales director at Danish and UK-based ebusiness company Catalog International, believes small to medium sized enterprises (SMEs) are increasingly driven by the e-marketplace.

"The largest organisations, like Ariba and Commerce One, are dictating the way that companies are doing business with each other and are demanding that SMEs have not only an e-procurement system, but also a strong electronic sell-side solution," he said. "Companies that fail to offer an effective buying and selling solution over the web will be sidelined and eventually forced out of online business communities."

BT has tried to circumvent this with its Commerce One-developed Marketsite. Businesses are encouraged to automate the buying process by using the Commerce One Buysite product on their intranet, but buyers can use different purchasing applications to communicate in real time with suppliers.

A survey by NOP Research Group at the end of March showed that 42 per cent of companies with over 500 employees used online ordering, while 27 per cent of businesses with fewer than 10 employees did the same. NOP attributed the lower figure among small businesses to the lack of a killer application and the need for management to be convinced of the benefits of going online. A MORI survey of 200 SMEs and 201 suppliers to SMEs found that 80 per cent of the former would shop around on the internet if there was a simple way to do it. At present, 28 per cent fail to get competitive quotes before making a purchase.

The costs of procurement can be high and the potential for cost savings would appear to be a compelling argument for e-procurement, whichever figures you look at. A European study by Metrica, commissioned by MRO.com, a specialist in e-procurement technology for the maintenance, repair and operations markets, found that procurement costs can represent between one per cent and two per cent of the costs of the goods purchased, and in some cases can even cost more than the goods themselves.

The survey found that the service sector has been the first to take advantage of e-procurement, despite the potential cost savings being higher for manufacturers. Over 55 per cent of UK firms planned to be using e-procurement by the end of this year, compared to 35 per cent in other European markets. Some 47 per cent already used, or planned to use it, for business travel, while 84 per cent used it for office supplies and 89 per cent for computer equipment. The main reasons that service businesses are not using e-procurement are concerns about security and problems of interfacing with other applications. Around 21 per cent see cost as a barrier.

The ebusiness journey
Ralph Simpson, senior ebusiness pre-sales manager at Walker, a global provider of ebusiness performance management solutions, believes e-procurement has yet to hit the small business marketplace. "Most SMEs are on the first stages of an ebusiness journey - either just publishing information on the web, or doing ecommerce, and selling their goods and services across the web," he said.

E-procurement giant Ariba is attacking what it describes as the second tier market in the UK, which it believes is ready to follow the US lead in terms of uptake. It defines second tier companies as those with under £3m annual turnover and fewer than 1000 employees. "The model has shifted from selling [e-procurement] software directly, to an application service provider package for SMEs," said John Watton, UK marketing director. He added that e-procurement is new to a lot of SMEs and that it is difficult to understand which type of small business is taking up the technology.

Watton highlighted one surprise finding in Ariba's research into the small business e-procurement market. Whereas the company expected SMEs to strongly prefer a packaged solution, its research found the opposite and that SMEs had a broader understanding of the technology than they had been given credit for. He said Ariba will be leveraging its established position in the field to market itself to small businesses as a company that is "tried and trusted".

Such businesses considering the suitability of e-procurement would do well to heed the words of Peter van der Geest, ebusiness director at Logical, a UK-based e-integrator. "The key to e-procurement is not necessarily the number of people within a company, but how much they procure. For example, a small steel manufacturer could have 20 employees but procure £100m worth of steel. It is the transaction size rather than the physical size of company that can benefit from ebusiness."

He believes that unless businesses can put a significant proportion of procurement over the web, cost savings will not be seen.

However, for the small business which has had little time to research competitive quotes or that feels its procurement costs are slipping out of its control, it does seem that now is the time to take the first steps into e-procurement. It could well pay dividends.